Brazil Corruption Probe Widens; Senate Leader, BTG Pactual CEO Arrested

This Feb. 26, 2014 photo, released by the Agencia Senado, shows Brazilian Sen. Delcidio do Amaral of the ruling Worker's Party. Brazilian police arrested Amaral, the government's leader in the Senate, for allegedly obstructing the investigation into a corruption scandal at state-owned oil company Petrobras. (Pedro Franca/Agencia Senado via AP)

Brazilian police on Wednesday arrested the government's leader in the Senate for allegedly obstructing the investigation into a corruption scandal at state-owned oil company Petrobras. Supreme Court Justice Teori Zavascki authorized the arrest of Sen. Delcidio do Amaral of the governing Worker's Party after examining evidence allegedly showing he interfered in the investigation of the widespread corruption-kickback scheme at the oil company.

Under Brazilian law, the Supreme Court must approve any investigation of legislators or top officials in the executive branch. Any criminal charges or trials of such figures must also must be approved and judged by the top court.

Associated Press report continues:

A majority of the 81-seat Senate also had to approve the arrest, and the body voted 59-13 late Wednesday to keep Amaral behind bars.

The vote means Amaral could remain in prison for an undetermined amount of time. Only Brazil's Supreme Court can now order his release, should it determine he does not represent a threat to the investigation.

The public prosecutors' office has 15 days to present the Supreme Court with formal charges against the senator.

Amaral's lawyer, Mauricio Leite, could not be reached for comment.

The federal police also arrested Andre Esteves, the CEO of the investment bank Grupo BTG Pactual. He's accused of obstructing the Petrobras corruption scandal.

Prosecutors have alleged that over US$2 billion was paid in bribes by businessmen to obtain Petrobras contracts, projects that then subsequently ballooned in costs. Investigators also have said that some of the money made its way to the Workers' Party.

Andre Esteves Photographer: Jin Lee/Bloomberg

Meanwhile Reuters reports that the chief executive of Brazil's biggest independent investment bank and the leading senator in the governing coalition were arrested on Wednesday on suspicion of obstructing the country's most sweeping corruption investigation ever.

The detention of such prominent power brokers on orders from the Supreme Court raised the stakes dramatically in a bribery scandal that started with state-run oil company Petrobras and now threatens the heights of Brazilian banking and politics.

The arrest of André Esteves, the billionaire CEO and controlling shareholder of BTG Pactual SA and Brazil's most influential dealmaker, sent the bank's listed shares into a dive that wiped out a fifth of its market value and raised red flags at the central bank.

Brazil's Congress also ground to a halt with the arrest of ruling Workers' Party Senator Delcídio do Amaral, a veteran lawmaker who has run the economic affairs committee and who has been key to President Dilma Rousseff's unpopular austerity program.

Brazil's currency fell as much as 2 percent as the scandal threatened both the country's sixth-largest bank and the president's sputtering efforts to pass a new budget and avoid another credit ratings downgrade to junk.

Brazil's central bank said it was monitoring the arrest of Esteves to see whether it would impact operations at BTG Pactual and trigger regulatory action.

Banking analysts warned that BTG Pactual, the largest independent investment bank in Latin America, could struggle to navigate Brazil's worst recession in a quarter century without its wunderkind founder at the helm.

Clients withdrew funds equivalent to less than 1 percent of assets under management at BTG Pactual, which was less than had initially been expected by some, said a source with knowledge of the bank's strategy.

The six-year-old BTG Pactual, which manages about 230 billion reais ($61 billion), tapped less than 5 percent of its about 40 billion reais in cash reserves to cover those redemptions, said the source, who requested anonymity because of the sensitivity of the issue.

SHOCKWAVES IN CONGRESS

The political gridlock that has obstructed economic policy this year is likely to worsen with the jailing of Amaral, one of about 50 Brazilian politicians under investigation for their alleged roles in a vast kickback scandal at the oil giant known as Petroleo Brasileiro SA.

Amaral's arrest was the first ever for a sitting senator in Brazil and it sent shockwaves through the capital.

Congress suspended its sessions as senators met to discuss how to handle the arrest. After a heated debate in which some government supporters defended Amaral, the Senate voted 59-13 to uphold the top court's decision to order his arrest.

Supreme Court Justice Teori Zavascki said he authorized the arrest after prosecutors presented a taped conversation in which Amaral tried to bribe Petrobras' former international director, Nestor Cervero, out of taking a plea bargain that could implicate the senator and other politicians.

Prosecutors alleged that Amaral conspired to help Cervero flee authorities. They also said the senator offered a monthly stipend to the former executive's family, financed by Esteves, who had obtained a copy of a plea bargain based on Cervero's testimony.

Cervero was received a 12-year sentence in August for corruption and money laundering in connection to bribes paid on two drillship contracts. Another defendant in the case testified that Cervero had passed bribe money to Amaral skimmed from Petrobras' controversial 2006 purchase of a refinery in Pasadena, Texas.

Amaral's lawyer, Mauricio Silva Leite, dismissed the accusation that his client obstructed the Petrobras investigation, saying it was based on the word of a convict. He also criticized the Supreme Court for ignoring the senator's immunity as an elected official.

SHARES DIVE

BTG Pactual confirmed the arrest of its chief executive and said the bank was available to cooperate with the investigation. Esteves' lawyer, Antonio Carlos de Almeida Castro, told reporters that the banker "certainly" had not acted to obstruct the investigation.

The bank's listed units, a blend of shares in its investment banking and private equity divisions, tumbled as much as 39 percent to an all-time low on the São Paulo stock exchange before paring losses to 21 percent.

Court representatives said Esteves had been arrested temporarily for five days, with a potential extension of five days. Amaral was arrested for an indefinite period.

Esteves, 47, has drawn on powerful connections in politics and global finance to steer BTG Pactual through turbulent times as Brazil's economy plunged into a sharp recession.

BTG Pactual's major deals with Petrobras have drawn the attention of investigators, including the bank's stake in Sete Brasil Participacoes SA, a supplier of oil-drilling platforms that has been swept up in the probe. BTG Pactual also bought half of Petrobras' Africa unit in 2013.

Last quarter, credit to oil and gas and infrastructure companies, which are the most impacted industries in the widening graft probe, accounted for about 16 percent of BTG's loan book. That is the largest exposure among Brazil's listed traded banks, according to Thomson Reuters data.

Brazil's central bank said in a press statement that it was monitoring the arrest of Esteves, adding that BTG Pactual has solid liquidity indicators and continues to operate normally.

The net worth of Esteves was last estimated at US$2.2 billion by Forbes Magazine.