Herman Sifontes used to manage more than $200 million in client assets as the head of Venezuela’s largest brokerage. Then, in the spring of 2010, he was arrested and his firm was shut down as part of a purge of brokers by President Hugo Chavez.
Today, according to his sister, Nathalie, Sifontes is studying Chinese history in the basement of a military prison and teaching guards English from his cell, Bloomberg Markets magazine reports in its January issue.
Chavez, ruler of the oil-rich country since 1999, has publicly blamed bond traders for accelerating inflation and devaluing the bolivar, Venezuela’s currency. In 2010, the country’s inflation rate was 27.2 percent. In just one month, from March to April of that year, consumer prices rose 5.2 percent.
On May 25, 2010, Sifontes and three of his partners at Econoinvest Casa de Bolsa CA were taken into custody by federal police. Within days, seven other brokers were arrested. Three weeks later, the financiers were formally accused by government prosecutors of illegalcurrency trading.
Tomas Sanchez, president of Venezuela’s National Securities Commission, said in a June 2010 interview with Bloomberg News that the brokers, who traded currencies on the bond market, were setting arbitrary exchange rates and crippling the economy.
“These were financial thugs,” he said.
‘Nest of Mafiosos’
On Venezuelan television in July 2010, Chavez described Sifontes and his associates as “a nest of mafiosos.” He also accused them of purchasing securities under false identities, though no such charges were ever formally lodged against them.
Since the government crackdown, more than 50 brokerages have gone out of business. Meanwhile, the economy has failed to pick up. Gross domestic product growth is expected to be 2.8 percent in 2011, according to the International Monetary Fund. That compares with an average 4.5 percent for Latin America and the Caribbean.
As of November, the annualized inflation rate stood at 27.6 percent, the highest among 78 countries tracked by Bloomberg. In an attempt to slow inflation, Chavez froze the prices of 18 personal care items from deodorant to toilet paper on Nov. 22 as part of a law that will seek to regulate as many as 500,000 prices in the economy.
While the economy grew 4.2 percent in the third quarter, key areas such as food productioncontracted 9 percent, adding to inflationary pressures. Amid a slow economic recovery, uncertainty shrouds Venezuelan politics.
Six More Years
Chavez announced in June that he had been diagnosed with an undisclosed form of cancer. A 57-year-old ex-soldier who has overcome a number of barriers -- including a poverty-stricken upbringing and two years in prison after a failed coup d’etat against the government in 1992 -- Chavez has said his illness will not deter him from seeking a third six-year term in the October 2012 elections.
As the election approaches, the government still has financial resources that can help Chavez at the polls. Venezuela, South America’s biggest oil producer, can borrow money, albeit at highinterest rates. During 2011, the government sold a record $7.2 billion of bonds to give the economy a boost, including stimulus spending on agriculture, public housing and job creation.
Sifontes and the other brokers were arrested at a time when the economy was hit by high inflation and an increasingly weak bolivar. In January 2010, Chavez announced a 50 percent devaluation of the currency, the first such measure in five years. The government then set two official exchange rates. One for essential imports such as food, medicine and machinery, which stood at 2.6 bolivars to the dollar, and a second rate for all other transactions, which stood at 4.3 bolivars to the dollar.
There was, however, another legal means of trading currencies: the bond market of which Sifontes and Econoinvest were a part. During the first five months of 2010, the fluctuating exchange rate on the bond market plunged 26 percent, reaching a record low of 8.2 bolivars to the dollar on May 11.
Venezuelans who purchased bonds to obtain dollars deposited their money in foreign bank accounts. These funds could be held as savings or used to pay in dollars for imports. Bond trading was not only legal at the time; the government participated in it by issuing bonds of its own.
In late 2009 and early 2010, Central Bank President Nelson Merentes made it clear that the government believed the country’s brokerages were instrumental in Venezuela’s economic decline, according to Eduardo Fortuny, then a board member of the Venezuelan Association of Brokerage Houses.
In private meetings with the group, Merentes called on the brokers to halt the bolivar’s slide or risk a possible confiscation of their businesses, Fortuny says. Merentes declined to comment on Fortuny’s account.
One week before Sifontes was arrested along with his Econoinvest partners Miguel Osio Zamora, Juan Carlos Carvallo and Ernesto Rangel, the government suspended private trading in dollar-denominated bonds and imposed new controls that gave