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Risco Brasil | Courts Uphold Derivatives Contracts

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so  far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are  potentially lethal. –Warren Buffet 2002

“It’s an established fact: corporate governance in Brazil is divided into two periods: before the derivatives scandal and after it.” –Rodrigo Zeidan, Fundação Dom Cabral.

According to research performed for the Folha de S. Paulo — and not, for some reason, by the FSP — courts are tending to uphold the caveat emptor school of thought on the subject of

I translate. Author: Adriana Aguia, Valor Econômico Portal ClippingMP.

The exchange-rate derivative contracts that pressured the finances of such major business groups as Sadia, Aracruz e Votorantim, causing billions of dollars in damage during the panic of 2008, are now being  recognized as valid by the Brazilian judiciary.

During the 15 minutes of fame generated by the Aracruz and Votorantim “too big to fail” derivatives cases, Brazil’s SEC, the CVM created and issued a new accounting form — above — in which derivatives contracts would be reflected on an appendix to the quarterly books.

In 2010, CVM issued Instruction 486/10,

which deals with the execution and clearing of derivatives contracts negotiated or registered in organized trading venues: the stock market, the commodity and futures market, and the organized OTC.  The main objective of Instruction 486/10 is to support information-sharing on derivative transactions conducted in the market or in an OTC by the oversight bodies of the stock, commodities and futures exchanges, in keeping with certain recent and unprecedented tendencies in the Brazilian market. Continue reading


G-Men Swarm the Bovespa!

DATELINE: SAMBODIA — Yesterday’s Valor Econômico carried a special section on law enforcement cooperation and financial crimes investigation training provided by the SEC and FBI to Brazilian federal police and the native securities regulator, the CVM.

The key analysis is translated from an article by Jonathan Weil of Bloomberg, who excoriates the PCAOB as a do-nothing enforcer of accounting standards.

The coverage was neither substantial nor all that newsworthy, given that the previous federal government had worked out an accelerated cooperation program in the wake of a series of cases in which Brazilian and U.S. authorities cooperated in multijurisdictional cases, financial in nature and otherwise.

Today, Relatório Reservado — my beloved carioca tip sheet, which admittedly sometimes makes up for in eloquence what it lacks in substance — follows up. This, says the Relatório, is not necessarily a drill.

The shock troop of 150 agents dug in inside the CVM has other, less transparent, reasons for its visit. They are here to look into suspicions that are being treated as a matter of state policy by the U.S. government: the supposed promiscuity between the Brazilian government and some of the major listed companies on the Bovespa — The São Paulo State Stock Exchange — both in Brazil and in New York.

The matter is the subject of three SEC investigations — Nos. 676.5600.200, 207.648.894.3 and 323.950.536 — and one from NYSE’s regulatory arm, Case 676.590.196.

Let me see if I can find those documents. They do not exactly pop right out at you in a search of the SEC Web site, but then again, this is the SEC Web site we are talking about.

The FBI is also looking into the charges.

The North Americans have come to the conclusion that the Bovespa lacks transparency and reliability when it comes to regulatory disclosure by listed companies, and is not in compliance with international rules in these areas.

Hell, you need not be a forensic accountant to reach that conclusion. But the dance of converging accounting standards is a slow and complex one.

… statistics provided by the Americans show that nearly 90% of the M&A deals closed in the last decade involved at least one of the three largest pension funds for federak civil servants — Previ, Petros and Funcef — or else investment funds specializing in the shares of Banco do Brasil’s investment funds or BNDESPar, the investment arm of the state-owned BNDES. Taken altogether, these institutions manage some US$ 600 billion.

The higher profile of Brazilian ADRs on the NYSE-Euronext also drives concern about state interventionism in this big-ticket firms, according to our carioca friend.

Our reporter says our gringo feds are not happy about the active role taken in large, expansive companies like JBS Friboi, Embraer, Embratel, and Brasil Foods — all of them in fourth-gear deal-making mode with subsidies from BNDES or the more indirect action of CALPERS-sized trade-union pension funds with close ties to a trade-unionist government.

We gringos are said to be alarmed, for example, by the ousting of Roger Agnelli from Vale do Rio Doce, apparently as a result of political considerations.

In a word, according to our man in Rio, our G-men are said to suspect the Brazilian federal government of directly manipulating stocks held by U.S. investors. This sounds a bit more like a talking point for trade talks than a subject for a roundtable on finding and seizing Bolivian drug money, however.  Continue reading

Sambodian Earnings and Yearnings, 4Q09

Rei Momo

To do: read these results ere the rowdy rein of Rei Momo arrives

DATELINE SÂO PAULO, BRAZIL — Can it really already be earnings seasons already in Old Sambodia?

Always a real Fat Tuesday for the newspapers, which get to charge prime rates for enormous earnings reports spanning entire sections. You gringos may read some of the very often badly translated results later in the Forms 20-F of firms with ADRs.

(At the risk of jinxing the deal, it could be that my professional life may soon be ruled again by the menstrual flow of corporate gross and P/E ratios. Enough said.)

Via the morning Investidor Informado clipping service.

A operadora de TV por assinatura NET registrou em 2009 lucro líquido de R$ 735,9 milhões, ante lucro de R$ 20 milhões no ano anterior. No demonstrativo publicado hoje nos jornais, segundo a legislação societária brasileira, o resultado teria sido de R$ 778,188 milhões, ante prejuízo de R$ 95,006 milhões do ano anterior. No quarto trimestre, o lucro líquido somou R$ 305,8 milhões, após o prejuízo de R$ 76 milhões registrado no mesmo período de 2008.

Pay TV operator NET recorded net profits of R$735.9 million in 2009, up from R$20 million in 2008. In the earnings statement published in today’s papers, 2009 net profits are stated as R$778.2 million, against a loss of R$95 million in 2008. In 4Q09, net profits were R$305.8 million, against a loss of R$78 million in 4Q08.

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“CVM Builds Barriers to BDRs”

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CVM: "The Securities Commission." Comparable to the U.S. SEC, but it's a something of a mistake to think it's the U.S. regulator's doppelganger.

CVM restringe ação de S.A. com sede em paraíso fiscal: Valor announces that the CVM (the “Brazilian SEC,” as it is sometimes erroneously referred to) will make it more difficult for offshore corporations domiciled in “fiscal paradises,” to list Brazilian Depositary Receipts on the local exchange.

Empresas brasileiras com sede em paraísos fiscais terão mais dificuldade para abrir capital e listar recibos de ações, conhecidos como BDRs, na Bovespa. O Brasil adotará regras semelhantes às dos EUA para controlar esse tipo de operação e garantir que as normas locais para estrangeiros sejam usadas apenas por companhias realmente internacionais.

Brazilian firms domiciled in fiscal paradises will have more difficulty opening their capital to public subscription and listing their depositary receipts, known as BDRs, on the Bovespa. Brazil will adopt results similar to those used in the United States to regulate this sort of transaction in order to guarantee that local rules for foreign investors are applied only to genuinely international companies.

This is, of course, a knee-jerk response to the highly public legal problems the Opportunity Fund and Agrenco find themselves in. A list of Brazilian investors in the (Brazilian tax-free) fund, which by law was not allowed to take on Brazilians investors, is supposed to be percolating toward publication.

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SEC On “The Issuer Pays”: Ratings Agency Facelift Falls?

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SEC Staff Report on Credit Rating Agencies, July 2008

Rating agencies do not appear to take steps to prevent considerations of market share and other business interests from the possibility that they could influence ratings or ratings criteria.

The SEC (PDF) report on the ratings agencies classified as NRSROs — nationally recognized statistical ratings agencies — tells a pretty simple story.

  1. The major rating agencies — Fitch, Moody’s and Standard & Poor’s — were told to develop and enforce policies to prevent conflicts of interest from potentially throwing a bias into analyst rating reports.
  2. The major ratings agencies developed those polices.
  3. But they do not enforce them.

The issue acquires particular poignancy at a time when the public is looking carefully at the performance of these agencies to determine their “failed prognostication rate” (FPR) — which is actualy just a piece of pseudoterminology I made up myself, but you get what I mean, right?

Freedonia sovereign debt is as solid as the Rock of Groucho, they say.

The Rock of Groucho turns out to have feet of clay. Citibank fires 20,000 employees. Goldman Sachs ponders vacating its Death Star building on Pearl Street and decamping for Tony Sopranoland.  The mayor of New York City — who is in the information and numbers business himself, and is actually quite good at it — looks at his tax revenue projections for the next five years and contemplates jumping out the window.

Each of the NRSROs examined uses the “issuer pays” model, in which the arranger or other entity that  issues the security is also seeking the rating, and pays the rating agency for the rating. The conflict of interest inherent in this model is that rating agencies have an interest in generating business from the firms that seek the rating, which could conflict with providing ratings of integrity. The Commission’s rules specify that it is a conflict of interest for an NRSRO being paid by issuers or underwriters to determine credit ratings with respect to securities they issue or underwrite. They are required to establish, maintain and enforce policies and procedures reasonably designed to address and manage conflicts of interest.35 Such policies and procedures are intended to maintain the integrity of the NRSRO’s judgment, and to prevent an NRSRO from being influenced to issue or maintain a more favorable credit rating in order to obtain or retain business of the issuer or underwriter

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