Francisco Illarramendi is currently appealing his 13-year sentence for securities fraud linked to the pension fund of Venezuela’s state oil company, Petroleos de Venezuela SA. In January, he filed an interesting document in the federal court, which I initially overlooked. If you’re interested in his case, it’s definitely worth a read. The document presents his account of events in extensive detail. Notably, he claims to have been the innovator behind Venezuela’s permuta Bs./$ bond sales system:
Before the current charges, Mr. Illarramendi was involved in the securities industry with Credit Suisse from 1994 to 2004, focusing on Latin American markets, including Venezuela (“BROV”). PSR, at 23. At Credit Suisse, he led a team that developed an arbitrage method for converting bolivars to U.S. dollars (“BVD/USD”), which enabled the BROV to fund itself at significantly lower interest rates. After taking a sabbatical in 2004, he accepted a special role as an advisor to Venezuela’s national oil company, PDVSA. PSR, at 22-23. During this assignment, he helped generate around $1.6 billion in savings, allowing PDVSA to repurchase $2.0 billion in outstanding bonds through his arbitrage strategy. This paved the way for the BROV to issue profitable bonds. Specifically, he advised the Venezuelan government to release bonds in U.S. dollars, purchased with bolivars at the official exchange rate, which lowered yield rates compared to those available in international markets. PSR, at 5. Ultimately, Mr. Illarramendi’s guidance provided significant financial rewards for both the BROV and PDVSA.
He goes on to explain how the fund, Highview Point, generated profits. If you’re interested in finance, you should check it out. He details how he found himself trapped in an unfortunate deal:
Around October 2005, Mr. Illarramendi and his family attended a wedding in Venezuela, where he was requested to facilitate the purchase and sale of a $50 million Credit Linked Note issued by Credit Lyonnais, which was sold by the BROV to Banco Federal. He had Highview Point (“HVP”)4 buy the note from Banco Federal and sell it to Calyon Securities. Unfortunately, Calyon Securities didn’t fulfill the transaction as planned. This led to immense pressure on Mr. Illarramendi to finalize the deal. His inability to execute the transaction resulted in a $5 million loss known by the Government as the initial “hole.” While still in Venezuela, he attempted to withdraw from the transaction, but with pressure from Banco Federal and BROV government officials, he understood that doing so might have dire consequences for him and his family. It was here that Mr. Illarramendi started to recognize the darker side of the financial success he had created within the BROV.
Chilling.
Mr. Illarramendi provided detailed accounts to the FBI and USAO, revealing his attempts to mask losses in managed funds, and that his outstanding liabilities surpassed the actual value of the funds’ assets from early 2006 until February 2011. … Mr. Illarramendi also admitted to paying bribes and kickbacks to PDVSA government officials, who were fully responsible for making investment decisions for the pension funds they managed. These kickbacks were intended to ensure liquidity for the MK funds and to “close the hole” that required his “scheme” to begin with. To meet the demands of PDVSA officials, Mr. Illarramendi caused his hedge funds to acquire an asset from PDVSA (the “Harewood asset”7) for $35 million, in exchange for $100 million investment from PDVSA.
He argues that this was not a Ponzi scheme, which makes me reflect on the times I referred to it as the PDVSA Pension Ponzi back in 2011.
Throughout his narrative, he insists that while PDVSA incurred losses, most were a result of kickbacks and corruption within the organization. He claims that due to exchange rate irregularities, his fund owed only $42 million, not $482 million, to PDVSA, implying that the receiver may have given the oil company too much. He describes himself as a pawn, while officials of the oil company truly benefitted from the entire operation.
Officials exploit their unchecked power to gain substantial personal benefits by using well-known intermediaries, an issue made easier by the “license to steal” culture pervading government operations in the BROV. It is hard to fathom how the Receiver and/or the Government could overlook the impact of this, failing to recognize many specific transactions involving these notable intermediaries. Records of these transactions corroborate Mr. Illarramendi’s claims in proffer sessions, indicating that his attempts to address the shortfalls were further hampered by government officials siphoning off potential profits through extortion. His clear expertise in VEB/USD arbitrage made him an enticing target for corruption; he grasped the transactional nuances yet was compelled to serve as a pawn for the benefit of Government officials since 2005.
Viewing the bigger picture, Illarramendi estimates that the permuta exchange system has yielded US$60 billion in financial advantages for both public and private sectors.
The statement continues for many pages, providing an in-depth lesson in Venezuelan exchange finance, and if you’re into that, I recommend reading it. It’s evident that this situation was quite chaotic.
This filing clearly didn’t succeed. It was an effort to obtain a lighter sentence, but he ended up facing a rather harsh one. I hear that the anti-Wall Street sentiment is influencing this outcome — as the government lacks the time or courage to pursue major banks, it’s focusing its efforts on less significant but more easily convictable financial offenders. That’s the reality.