CARACAS, Venezuela--In the Venezuelan government's perpetual battle with sky-high inflation, a group of bankers have paid a heavy price: prison time with no end in sight. But two years after state authorities shuttered their businesses and threw them in jail for allegedly violating strict dollar controls, four directors of the local brokerage house Econoinvest Casa de Bolsa CA expect to finally get their day in court as their trial kicks off Monday, according to members of their legal team.
The case has raised questions over judicial impartiality and the status of political prisoners under the leftist government of President Hugo Chavez, who, despite a prolonged battle with an undisclosed type of cancer, is running for his third six-year term in October elections.
In May 2010, Mr. Chavez launched a campaign against the Venezuelan brokers, charging they were illegally selling dollar-denominated government bonds for the local bolivar currency, fueling a vibrant currency black market and contributing to surging inflation.
Two years after the crackdown, Venezuela's inflation rate continues to be one of the highest in the world, registering at a 12-month rate of 22% in May. Meanwhile, economic growth has been sluggish, and analysts say the government will have to devalue its fixed exchange rate with the dollar next year in a bid to close a fiscal deficit and a widening gap between official and parallel exchange rates.
"It is possible that the government tried to blame the devaluation of the bolivar on the owners of the exchange houses, but at the end you don't know what the strategy was; there's still a parallel [currency] market in the country," said Barclays analyst Alejandro Grisanti.
Two spokesmen at Venezuela's attorney general's office did not respond to several phone calls and email messages seeking comment. A spokesman at the Finance Ministry also did not return phone calls.
In Venezuela, strict currency controls that were imposed to prevent capital flight make access to dollars illegal unless they are acquired through the government. Exchange houses, prior to their closing, played a vital role in supplying much of the private sector with the dollars they needed to conduct overseas business. Econoinvest was among the largest of such operations and managed nearly $200 million in assets.
But the Chavez administration cracked down on that process, calling the bankers "speculators" responsible for sinking the value of the bolivar to more than VEF8 compared with the state-set exchange rate of VEF4.3 per dollar.
In a July 2010 televised address, Mr. Chavez railed against the bankers, labeling them "a mafia" engaged in ripping off the Venezuelan people while hiding their profits in the U.S. But members of Econoinvest's legal team say the company did nothing wrong and did not violate a ban on commercializing sovereign bonds imposed in the months leading up to their arrest.
A resolution in the government's Official Gazette shows the ban was written into law only a week before Econoinvest's office in Caracas was raided by authorities.
"It is clear they are innocent, and holding people for as long as they have makes no sense," said Luis Valdivieso, an attorney representing Econoinvest.
Members of the legal team say hearing dates have been pushed back repeatedly by the government. The latest was last month, when a hearing was canceled after the lead prosecutor failed to appear in court, according to Mr. Valdivieso, who was present that day.
"I'm convinced that the Public Ministry [the attorney general's office] has no interest in having a case that involves evidence," he added.
Since the dismantling of the brokerage houses, Venezuela has continued selling dollar-denominated bonds as a way to distribute dollars into the local economy. But the operation is managed through the central bank. Still, local businesses complain there isn't sufficient access to dollars, and the regulations, critics say, have only hindered foreign investment into the resources-rich South American country.
"If you look at economic growth in the nearly 10 years since capital controls were imposed you will see that Venezuela has lagged others in the region," Mr. Grisanti said.
Economists now expect more than 5% growth in 2012, but the expansion is seen as unsustainable since it is boosted by heavy government spending ahead of hotly contested October elections. In addition, dollars still sell for more than VEF8.5 on the underground foreign exchange market, nearly double the state's fixed rate, according to LechugaVerde.com, a popular blog that tracks the rate.
A top economic adviser to opposition presidential candidate Henrique Capriles said in a February interview that a new government would look to gradually get rid of capital controls in a bid to boost foreign investment and economic growth.
The case of the Econoinvest bankers has drawn some comparisons with the government's imprisonment of Judge Maria Lourdes Afiuni, who has been in state custody since December 2009. Afiuni was arrested for ordering the release of a prominent Venezuelan businessman after he was held on charges of violating currency regulations for 34 months without a trial. Venezuela's constitution prohibits more than two years of pretrial detention. Her imprisonment has become a deeply
contentious issue for the Chavez government and has drawn widespread condemnation from international human rights organizations. But Beatriz Di Totto, a lawyer for the Econoinvest directors, said their legal team tried to steer away from making it a case about human rights or political prisoners.
"The Afiuni case has become bitterly divided between party lines with Chavistas on one side and the opposition on the other," Mrs. Di Totto said in an interview at her Caracas office. "We didn't want the politicization because we have a strong case that they are innocent."
The Wall Street Journal, Kejal Vyas
