Special Edition 02/2009 - Eletrobras debentures.

Court of Law in the State of Rio de Janeiro is exception to the World Bank`s Report

Yearly the World Bank publishes an important report named after the acronym ROSC (Report on the Overseeing and Observance of Standards and Codes), on which the World Bank presents its recommendations on the behavior of the international stock market and financial market.

The ROSC also contains studies on the compliance to the Accounting and Auditing Standards and Codes that take into consideration the necessity for adoption of international standards in the financial management of public companies, mainly when these companies publish financial statements that have to be increasingly transparent and reliable.

The intention of the World Bank is to help the country and the companies that seek for ways to be safely introduced in the international market, thus being able to attract reserves and investments. All countries and modern companies wish to achieve and maintain a qualitative rating of investment – the investment grade. This international rating is only granted to countries and companies that practice and demand for corporate transparency, juridical safety and the absence of “conflict of interest”. The gathering of these qualities is a clear sign of the aversion for risks.

The World Bank, based upon the diagnostic resulting from Brazil has recommended attention to the lack of preparation from the members (judges and supreme judges) of the Brazilian Courts of Law who do not have the necessary expertise to interpret, understand and judge on issues related to the stock and financial markets; i.e.; the evident difficulty of the Brazilian Courts of Law to understand the businesses involving debentures, bearer bonds, stocks, ADRs, swap operations, tag along operations, IPOs, “Chinese Wall”, interlocking directorate, hyper dumping, cartel in the purchasing of stock, among other crimes.

The World Bank has stated the following: “Judges have no training on financial and capital market issues, which limits their effectiveness to enforce civil and criminal actions in court.” Translation into Portuguese: “Os juízes não têm treinamento em questões do mercado financeiro e de capitais, isto limita a sua eficiência na aplicação de lei cíveis e criminais nos Tribunais”.

Based upon these observations the World Bank has led us to conclude about the lack of preparation of the judges who end up producing decisions that violate market rules overseen by the COSRA and by the BIS (Basel), among other institutions that are responsible for the everyday life of the stock market and the public companies that trade in the stock market. The businesses that take place at the BOVESPA, at the NYSE, at the LATINBEX and at the EURONEXT, among other stock markets, occur simultaneously interfering in the interests of countries, investors, public companies and private pension funds, Banco do Brasil and the Caixa Econômica Federal bank clients` pension funds, Sovereign Wealth Funds, all the market agents that rely on steady behavior and juridical safety, both have lacked in the Brazilian market.

All the agents of the Brazilian stock market wish them or not, are part of the world market, thus being subjected to the acts, treaties and international accords, which above all, respect the century old concepts and practices of good governance.

As the report of the World Bank reaches great respectability value, mainly in relation to the constructive recommendation done to the Brazilian Courts of Law, the Federal Courts of Law in the State of Rio de Janeiro should be put apart from any critical recommendation.

As an exception to the what was observed on the World Bank report, the Honorable Federal Judge Ms. Salete Maria Polita Maccalóz, on November 5th, 2008, demonstrates complete knowledge on the issues that involve the international stock market the public companies matters.

The Honorable Federal Judge issued a sentence on matters about the omission of liability and the unpayment of Eletrobras debentures – Eletrobras is a public company with a great amount of foreign partners. On her decision the Honorable Judge Ms. Salete Maria Polita Maccalóz put away the arguments that tried to give illegal privileges to Eletrobras, for the simple fact that one of its partners is the Brazilian Federal Government.

It is also relevant to bring into attention that the Honorable Federal Judge has gone in the same direction of what has been investigated by the SEC and the Brazilian Supreme Federal Auditing Court, besides many other international organisms that investigate the incestuous relationship fed by the “conflict of interests” that exists between the Brazilian Securities and Exchange Commission (CVM), the Central Bank of Brazil and the market regulation agencies, the 34 biggest pension funds in Latin America, the Banco do Brasil, Caixa Econômica Federal Bank, the BNDES and BNDESPAR, Eletrobras, Petrobras, Embraer, Vale, CSN, Oi-BrasilTelecom, that should be overseen without the interference of the “conflict of interest”. The overseeing institutions, in Brazil, have their presidents and directors directly and indirectly pointed out, kept in the position or even fired by the same controller partner of Eletrobras, Petrobras, Banco do Brasi and other business groups mentioned before.

This circumstance is very similar the Madoff case, unveiled this month. It is already considered one of the biggest frauds to the north American financial system, causing global losses estimated at USD 50 billion. The SEC (Securities and Exchange Commission), regulation agency for the USA securities market had not examined Mr. Madoff accounting books since the establishment of his company. Curiously Mr Madoff was a market regulation consultant for the SEC and a regular donator for political campaigns. 

The Brazilian Securities and Exchange Commission (name after the acronym CVM), in the voice of its president, clarifies that it does not see anything like this in Brazil. She is wrong! The “Eletrobras Case” has been persistently made public, and it is a  bigger scandal than the one mentioned within the previous paragraph. In the “Eletrobras Case” there are fraudulent balance sheets, omission of billions of dollars in liability, the lack of convertibility  into shares to debentures/bearer bonds, illegal appropriation of capital, illegal advance payment of dividends exclusively paid to BNDES, BNDESPAR, CAIXA ECONÔMICA FEDERAL and the BRAZILIAN FEDERAL GOVERNMENT in detriment to the other shareholders.

Mere coincidence with the Madoff Case is the fact that the agency that regulates the Brazilian securities market, CVM, has its president pointed out by the same controller partner of Eletrobras, as very clearly stated before.

However, there is not one similar fraud in Brazil, only a much bigger one!

The text that follows is the Honorable Federal Judge  Ms. Salete Maria Polita Maccalóz, from the 7Th FEDERAL COURT in the State of Rio de Janeiro, published on the Official Federal Jouranl (DOE) on December 12th 2008.

2005.51.01.024316-8 4002 – EXECUTION FOR EXTRAJUDICIAL BOND
Established on December 9th 2005
Plaintiff: FRIGORIFICO NOROESTE LTDA.
Attorney: EDISON FREITAS DE SIQUEIRA
Defendant: CENTRAIS ELETRICAS BRASILEIRAS S/A – ELETROBRAS AND OTHERS

7TH FEDERAL COURT OF THE STATE OF RIO DE JANEIRO – SALETE MARIA POLITA MACCALOZ (JUDGE)

Sentence: SALETE MARIA POLITA MACCALOZCOMPENTENCY EXAMINATION

1. Signatures, etc.
1.1 It is about the EXECUTION FOR EXTRAJUDICIAL BOND proposed by the herein nominated plaintiff, described in the initial. Considering that the CENTRAIS ELETRICAS BRASILEIRAS S/A – ELETROBRAS and the BRAZILIAN FEDERAL GOVERNMENT, and the plaintiff claims to be creditor of Eletrobras for the “Compulsory Loan” (specific kind of taxation) on the Electric Power – ECE.

2. During the examination of the evidences for the pre-execution exceptions analyses we have concluded that:

2.1. COMPULSORY LOAN: Charged on the consumption of Electric Power (ECE), created by the Act number 4156/62, with later modifications, and its last format:

*the possibility of the consumer of Electric Power take ELETROBRAS bearer bonds ended on December 31st 1973;

- to be paid in 20 years;
- to 6% of interest per year;
- on the face value, that can be updated;

* Act number 5.073/66, on August 25th 1966.So, the compulsory loan paid from 1963 to 1973 was only reimbursed in this way: consumers that presented their paid light bills received bearer bonds or debentures, of different issuing series. Obviously the reimbursement term was 20 years counting from the date on each bond.No doubt the right for action of the bearer of this bond will start after this expiration date, in accordance to the Civil Code (commercial legislation) on that date.ELETROBRAS itself states that on its web site “2001-2002 ELETROBRAS – All rights reserved”: “The collections from 1964 to 1973 where paid with the delivery of bearer bonds, according to the characteristics of the second series, year of the issuing, issued from 1965 to 1974, denominated ELETROBRAS BONDS, in cash….”(excerpts).

2.2. BEARER BONDS OR DEBENTURES

As the “Compulsory Loan” has been paid it ceases to exist as a tax, because the act has permitted this kind of payment and, consequently the BRAZILIAN FEDERAL GOVERNMENT ceases to be liable and the credit from then on is of evident private nature.

The payment of the “Compulsory Loan” has happened with bearer bonds, which is a credit bond of widely traded, trade on the counter.

On the three regulating act for the Public Companies this kind of credit is mistakenly named debentures. This must be made very clear for the fact that ELETROBRAS has registered, with distinct description, this title as BEARER BOND.

In the registry of its BONDS the company issued them as “in accomplishment” of the compulsory loan act, shaping wrongly its interpretation:“BEARER BOND issued in accomplishment to the COMPULSORY LOAN ACT NUMBER 4156, on October 28th 1962 and the ACT NUMBER 4364 on September 22nd 1964”, trying in this way to keep this credit bond`s liability linked to the FEDERAL GOVERNMENT OF BRAZIL, as if it were still the tax that should be reimbursed.

Debentures or Bearer Bonds are titles that represent a loan of the public company (of many partners) granting to the bearers of the same series of bonds identical rights in relation to this company (group of partners).

If the Act that has authorized the grantee of this “Compulsory Loan” to pay for this loan in bearer bonds, in this same process has converted a “state debt” into a private debt. And the nature of this legal command could not be different, because if the loan had the purpose of implementing the production of electric power, increasing ELETROBRAS assets, why would the Public Revenue Department be liable for that reimbursement?  The shareholders from this company that are private investors would be illegally benefited with this “tax”(the so-called “compulsory loan”) with a payment in double.

The State in the condition of partner to private investors does not have any privilege typical of its public essence, so, if the tax, collected compulsorily, was given to a public company partly owned by the state and partly owned by private investors, the only liability from this loan falls upon the company that received it.

Repeating the only possible conclusion: when a “public” debt is paid with private bonds, this issue is no longer of the Federal Justice. Here there shall be only the lawsuits on the compulsory loan, its updating, interest, etc, when not decayed.

The FEDERAL BRAZILIAN GOVERNMENT has no interest in following up of this lawsuit, even being a majority shareholder of the company (nominative shares), even if its attorney expressly claims for it. Why to grant this special court (with terms in double, and cost exemption) for a private company? How to justify this to our society and the other companies?

2.3. PRESCRIPTION OF THE TERMS (DEADLINES, EXPIRATION DATES)

The bearer bonds presented had a period of time of 20 years to be paid, during this period the bearer could not charge for them, could not act.

The SJT (Superior Court of Justice) has decided favorably of a 20 year period, accordingly to a great number of sentences judged in compliance of the Jurisprudential summit number 39.
3. Thus, as the complaint of the Plaintiff is alive and because it is of a private nature and having ELETROBRAS as the only defendant, a exclude from this lawsuit the BRAZILIAN FEDERAL GOVERNMENT, declining the competence of this court to judge this lawsuit in favor of the State Justice.

Send, with the usual care, the minutes of this session an this lawsuit to the State Justice Court in this capital, with our regards.

Publish and Notify.
Published in the Official Federal Journal on December 12th 2008, pages 11/12 (JRJERJ)

Follows, for our readers easier understanding, the World Bank`s ROSC mentioned above.

SECOND PARAGRAPH ON PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH VERSION:
“"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."

THE TRANSLATION OF THE EXERPT ABOVE INTO PORTUGUESE:
“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.”

THIRD PARAGRAPH OF THE PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH WRITING:
"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".

TRANSLATION INTO PORTUGUESE:
“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.”

FOURTH PARAGRAPH OF THE PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH WRITING:
"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]".

PORTUGUESE TRANSLATION OF THE EXERPT ABOVE:
" 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".

FIFTH PARAGRAPH OF THE PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH WRITING:
"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".

PORTUGUESE TRANSLATION OF THE EXERPT ABOVE:
"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".

SIXTH PARAGRAPH OF THE PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH WRITING:
“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”.

PORTUGUESE TRANSLATION OF THE EXERPT ABOVE:
“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”.  

SEVENTH PARAGRAPH OF THE PAGE 5 OF THE “ROSC” WORLD BANK REPORT ON ITS ORIGINAL ENGLISH WRITING:
"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).

PORTUGUESE TRANSLATION OF THE EXERPT ABOVE:
“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.”
.

>> Read the whole ROSC

>> See the whole interpretation on the trully independent auditors report on the Minutes of Eletrobras Shareholders meetings and the Balance Sheets of the company.

ÉDISON FREITAS DE SIQUEIRA

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