Special Edition 01/2009- Eletrobras debentures.


The function of the specialized press is to “translate” the economists’, financial analysts’ and lawyers’ technical language to the non-specialized public, this is extremely relevant for the society. This task is very important for all those who need to understand the national and international economic scenario and that do not have time to follow the economic and financial information sources and all the new facts of these sectors.

The newspaper “Valor Economico” is one of the Brazilian references on the economic journalism. However, once more – unexplainably – the newspaper Valor Economico publishes an article about ELETROBRAS that reveals complete lack of factual and technical basis. If it were not for the good reputation of specialized newspaper one could have presumed there was some kind of information manipulation on the interpretation of court decisions that involved the Public Company (ruled by the private Brazilian law) named ELETROBRAS S/A.

The fact is the repetition of evident flaws that have occurred on the articles published by this newspaper had already proved that the reporter behind the newspaper does not understand the facts about which he writes (and this has occurred repeatedly for several months).

Actually the mentioned reporter presumably intends to guard interests from outside giving a personal interpretation on how important this Brazilian court decisions that involve ELETROBRAS are, even though these decisions are not definitive, as the referred journalist states.

This position is extremely perilous because it does not consider the texts of the national and international bills/acts, besides the international accords and treaties on the issue.

In relation to ELETROBRAS, it is good to mention that many articles published by the Brazilian press come to the absurd of ignoring the existence of investigations by the SECURITIES AND EXCHANGE COMMISSION (SEC) and the Public Company Accounting Oversight Board (PCAOB) in the USA where they examine, among other frauds, illegalities, and frauds to the balance sheets on the omission of billions of dollars in liabilities and preferred stocks, illegal appropriation of capital, illegal advanced payment of dividends paid exclusively to BNDES, BNDESPAR, (Bank) CAIXA ECONÔMICA FEDERAL  and the FEDERATIVE BRAZILIAN REPUBLIC to the detriment of the other shareholders (http://www.edisonsiqueira.com.br/debentures/auditoria.html).

It has also been proved – on documents – the practice of the imprudent management, absence of corporate transparency and bondages with the overseeing institutions filled up with “Conflict of Interests”. The Brazilian Securities and Exchange Commission (CVM) and the Central Bank of Brazil, which should have the impartial function of overseeing and regulating the stock market, coincidently have their directors and CEO chosen, hired, and kept in the position by the controller partner of ELETROBRAS, this reveals a suspicious, conflictive and, why not to say, incestuous relationship.

Even with the serious and repeated problems in the Brazilian entities, the USA market has systematically invested on ELETROBRAS and on its controller partner and other private companies that are also (directly of indirectly) controlled and financed by the same controller partner of ELETROBRAS (reminder: The USA is the world stock business center with independent overseeing and police entities). 

After dozens of accounts published in the Brazilian press to the order of the Chairman of ELETROBRAS (see the example of the news published on October 20th 2008, saying that the Securities and Exchange Commission granted the upgrade on the rating level of this company at the NYSE - New York Stock Exchange). The piece of news on the registry of ADRs is not a new fact. The ADRs issued by ELETROBRAS, for a long time, have been registered on the NEW YORK STOCK EXCHANGE under the acronyms GAIGY and GAIFY, as level I. For this reason the directors, and members of the managing council of this company are under the jurisdiction of the severe North American law.

To the contrary of what has been published, ELETROBRAS, besides not having gone up on the NYSE ranking, along with other Brazilian companies being similarly investigated, it is very possible that the trading of these stocks may be prohibited in the USA, not to mention that many of their managers may be condemned to imprisonment and the payment of heavy fines that amount to millions of dollars, in case the US Government and Courts discover the ELETROBRAS case is bigger and more complex than the ENRON/ARTHUR ANDERSEN scandal – 2001 – in which the imprisonment sentences reached 100 years and the fines – summed up – were over 3 billion dollars.

The piece of news published on the newspaper Valor Economico, which is being herein criticized, once more essentially demonstrates how worrying it is to grant assessment power on a very technical area to a technically unqualified reporter.

Professionals that do not have the necessary technical qualification that the complexity of the issue demands for cannot deal with billionaire issues of international repercussion – issues that are typical of the stock market.

The Brazilian Supreme Court of Justice decision, mentioned by the reporter as the “unifying” of unappealable jurisprudence, may be re-appreciated by a superior level of the Brazilian justice. If this decision were to be considered permanent it would affect all the debentures and bonds issued by Brazilian companies and banks.

If the mentioned court sentence were valid as a rule superior to the Brazilian Constitution and the Brazilian Public Companies’ Act, companies and Brazilian banks that trade their bonds and assets in stock markets, besides having to pay the price for being inserted in an under developed economy of disproportional taxes, they would be the only companies in the world to own a sub-species of debentures or stock convertible bearer bonds. These bearer bonds would value less than the bonds issued by the public companies that have their headquarters in countries of developed economies or/and that are overseen by more transparent, impartial and – mainly – specialized entities than the ones that oversee, for instance, the Brazilian market.

For these reason it is correct to state that the Brazilian newspaper Valor Economico has brought to the public attention a false piece of information on a controversial issue that is pending of definitive judgment, and, worst of all, in a tone of “victory” for ELETROBRAS, and, supposedly for the Brazilian economy.

Thus, it is terrifying that a very important newspaper in a specialized area of journalism gives national public visibility to an incorrect and baseless piece of news on the “unifying” of jurisprudence on a certain matter of high sensitivity to the Brazilian and international stock market.

In fact, the abovementioned court sentence, has been repeated and it is about a second level judge’s decision from the Second Team of Judges from the Brazilian Superior Court of Justice (STJ) that may still be judged by a superior level on the possible attachment of these debentures in lawsuit files for debt collection lawsuit.

So this decision is of one only “chamber”, of one specific “sector” and “not definitive”, it is not a decision of the “merit”, in a future occasion the validity or not of the bearer bonds issued by public companies under the jurisdiction of private commercial law legislation will be judged.

The above referred court decision, that comes from one team of judges of the Superior Court of Justice (STJ), besides not being a unanimous sentence, and, for this reason, not being an incident of “Jurisprudential Unification”. The Court of Law session presided by the Minister Humberto Martins, and followed up by brilliant vote of the Minister Teori Zavaski, will certainly not prevail when analyzed   in depth and under the light shed by proofs, the Brazilian constitution and the national and international legislations involved, including the force of International government treaties and accords that are hierarchically superior and determine the international juridical order.

However, it is correct to state that there is an important deadlock in the Brazilian juridical scenario in relation to the technical understanding of the bearer bonds (issued by the order of the shareholders from public companies under the private commercial law jurisdiction) that promise the convertibility of these bonds into shares, this characterizes “a liability relationship between the company that has issued the debentures and the domestic and international stock market”, in relation to the place and the bearers of these bonds as it is properly regulated by the Resolution number 109 by the Central Bank of Brazil. 

These titles are named – for these reason – debentures or bearer bonds – words that are synonymous. The historical origin, besides the great volume of international legal basis, does not allow any doubt in relation to the above-mentioned interpretation.

These issues make of the isolated and unicameral, partial Brazilian Superior Court (STJ) decision/sentence easily subjected to the filing of an “Extraordinary Procedure” at the Supreme Federal Court (STF).

Actually the decision/sentence being discussed here has unexplainably and directly violated (at least) the articles 3rd and 173rd of the Brazilian Federal Constitution. Besides being contrary to the usual practice of the international market since the Industrial Revolution. If this circumstantial decision were to be definitive it would harm the whole economy, companies and Brazilian banks.

The point of view of the Valor Economico newspaper’s reporter, as well as his biased interpretation of the law and of the facts that were offered to the less technical reader, only demonstrates how efficient are ELETROBRAS press releases that give repercussion and protection to ELETROBRAS’ policy of abusive “unpayment”. The news articles on the subject are highly complex as well as the news articles (reviews) on the domestic and international securities and financial market, that is why impartiality and technical understanding are fundamental to all who want to work in this professional area, no matter if this professional is a judge, lawyer, economist, financial analyst or media professionals.

Even the Brazilian courts, which have our greatest law specialists, have just started to examine the issues and situations related to these markets.

Only now – very recently – few Brazilian companies have started to take advantage of IPOs and the issuing of debentures/bearer bonds so as to attract investment from the local and international financial and stock markets.

Short time ago barely all Brazilian entrepreneurs – indistinctively – used loans as a way to gather money for their companies.

It was the economy’s globalization, the universal use of internet, and the facts that the New York Stock Exchange (NYSE) has been absorbed and become a part of the EURONEXT and LATIBEX operations, the creation of the COSRA also took Brazilian companies to use the market and stock market in order to raise funds, this started to happen some 6 years ago.

Even though most part of the Brazilian brokers have a shallow idea of the meaning of, for instance, SOX, COSRA, BASEL II, CHINESE WALL, DERIVATIVES, HEDGE, SWAP, WATERED STOCK, EURONEXT,LATINBEX, INTERLOCKING DIRECTORATE, IPOs,  DISCLOSURE, DEFAULT, FUND, ASSETS among other jargon words mentioned on the legislation and practice of the international market.

For this reason the courts, reporters, risk and rating analysts and even the Brazilian authorities have great difficulty to understand the overseeing mechanisms and the local and foreign legislations, as well as the international treaties and accords that regulate the Brazilian the international stock and financial markets as a whole, these circumstances are above any court decision or piece of news of an isolated case that does not change the century old market that has its own intelligence, methods and rules.

One court sentence contrary to a consecrated international practice only has the power to weaken the country and the institutions that need juridical safety, granting international credibility enough to captivate and maintain the investments mentioned on the article 3rd of the Brazilian Republic’s Constitution, from which derivates the Brazilian Public Company Act.

The juridical safety of the Brazilian Financial and Stock Markets must – mandatorily – portray the matter of “SOVEREIGN INTEREST OF THE FEDERATIVE BRAZILIAN REPUBLIC” and never on the adventure of an unprepared analyst. All public companies, banks, brokers, stock markets and Brazilian investment funds depend upon globalized businesses.

In this sense the World Bank, has clearly stated to the Brazilian institutions on the “ROSC” report that they are totally unprepared for the world financial and stock market crisis…

“WORLD BANK - ROSC -Reports on The Observance Of Standards & Code" - Page 5...

“"Directors appointed by pension funds usually have a close relationship with the fund or the fund's sponsor, i.e. they are current or retired employees; and may therefore not be seen as independent. Also, they do not always have the training necessary to assume this responsibility in the best interest of policyholders. Consideration should be given to introducing independence requirements in the medium term, in conjunction with such rules in general for listed companies or specific tiers."

“Os diretores indicados para os fundos de pensão normalmente tem relações próximas com o fundo ou o patrocinador do fundo, isto é, eles são funcionários da ativa ou funcionários aposentados; e, portanto, podem não ser vistos como independentes. Ademais, eles nem sempre têm o treinamento necessário para assumir esta responsabilidade perante os melhores interesses dos gestores. No médio prazo deveria se considerar a introdução de independência como requisito, em conjunto com tais regras em geral para as companhias listadas ou para ligações específicas.”

"Large listed SOEs, such as Petrobrás and Banco do Brasil, are traded on the main market. Policymakers should consider changing the bylaws of these firms so that they could migrate to the corporate governance segment Level II. Such action would boost the corporate governance cause and provide listed firms with a model to emulate".

“Uma ampla lista de SOEs (Empresas de Propriedade do Estado), tais como a Petrobrás e o Banco do Brasil, negociam no mercado principal. Os gestores deveriam considerar mudar os estatutos destas empresas para que elas pudessem migrar para o segmento de Governança Corporativa de nível II. Uma ação deste tipo iria incrementar a causa da Governança Corporativa dar as empresas listadas um modelo para copiar.”

"Judges have no training on financial and capital market issues, which limits their effectiveness to enforce civil and criminal actions in court. CVM may act as amicus curiae and provide advice to the court, if so requested. For the courts to become more efficient in financial market matters, policymakers should consider adding courses on finance and capital markets to the curriculum for judge. Though judicial reform is not the primary focus of this ROSC, it should be noted that a thorough judiciary reform is needed. Civil procedures need to be addressed in view of shortening the appeals process. Further changes are needed at the level of the Superior Courts, promoting modernization and efficiency of the judiciary, and of court structures as a whole[1]".

" Os juízes não têm treinamento em questões do mercado financeiro e de capitais, isto limita a sua eficiência na aplicação de leis cíveis e criminais nos tribunais. A CVM pode agir como amicus curiae e dar conselhos para os tribunais quando requisitada. Assim os tribunais se tornariam mais eficientes nas questões do mercado financeiro, os gestores deveriam considerar a adoção de cursos sobre o mercado financeiro e de capitais para o currículo dos juízes. Embora uma reforma judicial não seja o foco do ROSC, deve ser salientado que uma ampla reforma do judiciário se faz necessária. O Processo Cível deveria ser contemplado com o objetivo de encurtarem-se os apelos no processo. Mais mudanças são necessárias no âmbito dos Tribunais Superiores, promovendo a modernização e eficiência do judiciário, e das estruturas dos tribunais como um todo".

"Under concentrated and complex ownership structures, the same family may own listed companies and private firms and the relationship between the different parts of the business group may not be transparent to an outsider. Minority investors may not even know the controlling shareholder's position in related companies nor how business between companies of the same group could benefit that shareholder to the detriment of their financial position. Misuse of corporate assets and abuse in RPTs can be perfectly legitimate under the law. Nevertheless, RPTs represent an equitable treatment problem in Latin America. This is why it is imperative that policymakers establish clear, bright line rules on how such transactions should be approved".

"Sob complexas e concentradas estruturas de propriedade, a mesma família pode ter a propriedade de companhias listadas e de empresas privadas e a relação entre diferentes partes do negócio podem não ser transparentes para quem está de fora. Investidores minoritários podem nem saber a posição de Sócios Controladores em empresas relacionadas ou nem saber como os negócios entre companhias do mesmo grupo poderiam beneficiar este Sócio/Acionista em detrimento da posição financeira destes minoritários. O mau uso dos ativos da corporação".

“For example, in Chile a transaction between the company and a director, manager or controller, directly or indirectly, is deemed a related party transaction. This definition includes loans to directors. The related party must disclose his/her interest to the board and the regulator. The board must either approve or reject the transaction with the abstention of the interested director or, if the board is unable to reach a decision, hire two independent evaluators. Their reports are available to the board and shareholders for 20 working days and transmitted to the regulator. Related party transactions must be disclosed at AGMs. When expert opinions differ substantially, or if shareholders with at least five percent of outstanding shares consider the transaction detrimental to them, the transaction must be approved at an EGM by 2/3 of voting shares”.

“Por exemplo, no Chile uma transação entre a companhia e o diretor, gerente ou controlador, diretamente ou indiretamente, é tratada como de uma parte relacionada. Esta definição inclui empréstimo aos diretores. A parte relacionada deve publicizar o seu interesse aos diretores e ao regulador. Os diretores, ou se os diretores, não conseguem aprovar ou rejeitar a transação com a abstenção de interesse, contrata-se dois avaliadores independentes. Seus relatórios estarão disponíveis para os diretores e acionistas por 20 dias úteis e é encaminhado ao regulador. Transações com partes relacionadas devem ser reveladas em Assembléias Gerais de Acionistas. Quando a opinião de especialistas diferem substancialmente ou dos acionistas com pelo menos 5% de ações que considerem a transação como prejudicial para eles, a transação deve ser aprovada em assembléia por dois terços das ações com direito a voto”.  

"Additional recommendations are provided in the annex on Page 19-20.
As the main long term lending institution BNDES should make compliance with certain corporate governance Standards a prerequisite for lending (Standards of the type used in the Novo Mercado (Brazilian new corporate governance guidelines), for example).

“A instituição de empréstimos de longo prazo BNDES deveria estar em conformidade com certos padrões de Governança Corporativa, um pré-requisito para emprestar (padrões do tipo usados no Novo Mercado, por exemplo). Recomendações adicionais encontram-se nos anexos nas páginas 19 e 20.”

The World Bank`s conclusion stated on its “ROSC” report should mandatorily call the attention of the public concerned with Corporate Governance, of the journalists, economic analysts, as well as of the accountants, public companies that have bonds traded in stock markets, the staff of the Brazilian Securities and Exchange Commission (CVM), the board and the staff of the governmental regulatory agencies and investment analysts, among others.

It is high time the ELETROBRAS case - its huge unpaid debt and frauds of international repercussion – was perceived as dangerous by the other Brazilian companies that have plans to use debentures/bearer bonds or IPOs in the international stock market as a tool to obtain the investment from global reserves at a much more competitive price for economic growth and job development.

BRAZILIAN GOVERNMENTAL INSTITUTIONS, NEWSPAPERS AND COURTS SHOULD ANALYZE THE ELETROBRAS CASE STARTING FROM THE FACT THAT THIS ISSUE INVOLVES “STRATEGIC NATIONAL INTEREST”, far from the inexperience and of lack of basic concepts and technical knowledge as shown to us on the article published in the above mentioned specialized newspaper.


SIQUEIRA, Édison Freitas de. O BILIONÁRIO CASO ELETROBRÁS - BANCO MUNDIAL - RELATÓRIO ROSC E A IMPRENSA. Tributario.net, São Paulo, a. 5, 27/11/2008. Available at: <http://www.tributario.net/artigos/artigos_ler.asp?id=33987>. Accessed on: 18/12/2008.

>> Read the World Bank Report - ROSC.

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