BRASILIA (Reuters) - Five years before his arrest in a political corruption scandal, billionaire financier André Esteves was nearly banned from banking in Brazil due to irregular trading, according to a central bank document reviewed by Reuters.
Central bank investigators recommended in October 2010 that Esteves, who founded and ran investment bank Grupo BTG Pactual SA (BBTG11.SA) until last November, should have been barred from managing financial institutions for six years due to "serious infractions" of banking rules between 2002 and 2004, the document showed. (reut.rs/1RszQku)
The severe punishment under consideration was eventually reduced to fines for Esteves and the bank, but it showed Brazil's most influential dealmaker attracted regulators' scrutiny for more than a decade before his downfall last year.
Esteves declined to discuss the case while BTG Pactual referred inquiries to securities filings at the time.
Central bank director Sidnei Corrêa Marques, who ruled against the proposed ban, told Reuters in an interview he considered the crucial role of the bank and its CEO in the financial system when making his decision.
Esteves was arrested in November and charged with obstructing a corruption probe at state-run oil company Petrobras (PETR4.SA) by conspiring to help a Petrobras executive who was a potential prosecution witness flee the country.
He denied any wrongdoing but stepped down as chief executive and chairman of BTG Pactual and passed control over Latin America's biggest independent investment bank to seven partners.
After spending three weeks in prison, Esteves was released on house arrest last month pending trial.
The investigation from a decade ago that could have derailed his banking career years earlier focused on nearly $3.8 billion of trades between the bank, known then as Banco Pactual SA and Delaware-based Romanche Investment Corporation LLC.
Romanche was created 15 years ago as a limited liability corporation, without public disclosure of its ownership, and the law firm at its registered address declined to comment. The company did not file annual tax reports in Delaware as required and still owes $1,004 there, according to public documents.
The securities regulator CVM found in a separate probe that the trades served to transfer Banco Pactual's profits out of the country and potentially reduce the bank's tax bill.
The central bank and CVM investigated alleged banking and securities infractions, leaving assessment of the tax impact to Brazil's federal revenue service, which declined to comment on the case. Reuters could not determine how the bank's tax payments were affected by the transactions.
In a 2007 settlement, the CVM fined both firms, Esteves and another executive 8.1 million reais, or about $4 million at the time. BTG Pactual and Esteves did not admit to wrongdoing in the settlement. The CVM declined to comment.
After its own probe, the team of central bank investigators called for a six-year banking ban for Esteves, a one-year ban for another executive responsible for trades on Sao Paulo's BM&F exchange, and a fine for Banco Pactual in the recommendation reviewed by Reuters. It said the bank was incurring "deliberate losses" via trades with Romanche which constituted "serious infractions in the management of a financial institution."
But Marques, who had the final say in the case, decided against the proposed ban. In April 2013, after an additional investigation, he slapped fines of 100,000 reais ($25,000) on both executives and a fine of 25,000 reais for the bank.
Marques said the punishment was proportional to the executives' actions, which did not have "harmful consequences" for the financial system.
"When a bank is important systemically, important to the country, among the 10 largest, I have to be careful about getting rid of essential management at that financial institution," Marques said.
A week before the recommendation reached Marques' office in early 2011, BTG Pactual helped the central bank rescue troubled mid-sized lender Banco PanAmericano SA, agreeing to take a stake in the bank.
Marques did not comment on the transaction, which Esteves said at the time would broaden BTG Pactual's business portfolio.
A knack for dealmaking also made Esteves, now 47, Brazil's youngest billionaire and the face of his country's decade-long economic boom. Harvard Business School named a dorm for Esteves after a "significant personal donation".
However, his rise was punctuated by occasional brushes with regulators at home and abroad.
In 2012, Italy's financial regulator fined him 350,000 euros ($375,000) for insider trading around a joint venture announced by Italian meat company Cremonini SpA in 2007.
Esteves disputed the charges and in an appeal got the fine cut in half. But the case grabbed headlines just 10 days before BTG Pactual's initial public offering, forcing the bank to let investors back out if they wished.
Since Esteves was snared in the Petrobras scandal last year, shares of BTG Pactual have lost about 50 percent and the bank was forced to sell assets and tap an emergency credit line from Brazil's deposit guarantee fund to allay fears of a cash crunch. (Graphic:tmsnrt.rs/1O9axzo)
($1 = 0.932 euros)
($1 = 4.022 Brazilian reais)
Reporting by Marcela Ayres; Writing and additional reporting by Brad Haynes; Editing by Tomasz Janowski