Fraud at Vadesa: Shareholders have no rights in Venezuela
Aleksander Boyd interviews Miguel Angel Capriles Cannizzaro
London 12.06.06 | One of Venezuela’s largest media conglomerates, Cadena Capriles, is at the centre of an ongoing, bitter family dispute between its founder’s first family –composed of wife and 7 children, and the second family, that of the founder’s widow and her only son. What follows is an account of one of the parties, namely that of Miguel Angel Capriles Cannizzaro, only son of the second and last marriage of the holdings’ owner. The purpose of this article is to shed light upon the case, for it carries especial significance, given the fact that 80% of the propaganda published by the Venezuelan government is printed on Ultimas Noticias and El Mundo, two newspapers that form part of the family state, which are currently controlled unlawfully by Miguel Angel Capriles Lopez. Equally relevant are the manifold conflict of interests that resulted after fraud completion that are indicative of the state of the judiciary in Venezuela . Firstly I would like to provide a description of the different families, which is a must to follow the saga.
- Miguel Angel Capriles Ayala (MACA) married Carmen Cecilia López Lugo, also a Venezuelan national, in 1939 (the First Marriage).
- At the time of this First Marriage, MACA not the rich man he was when he died. The First Marriage was celebrated without “capitulaciones matrimoniales” meaning that under Venezuelan law, any and all assets acquired during the marriage belongs to a marriage community; half to the husband, half to the wife. The marriage community between MACA and Carmen Cecilia López Lugo will be referred to as the First Marriage Community
- Under Venezuelan law, if a marriage couple divorces, the marriage community needs to be ascertained and liquidated thereafter. The marriage community stops to grow at the moment the parties file for divorce or for “separación de bienes”.
- The Capriles-López couple (the First Marriage of MACA) had seven (7) children: six (6) daughters: Carmen Cecilia, Adelaida, Mishka, María Pia, Perla, Cora, and one (1) son, Miguel Angel (henceforth Michu). All of them go with the last names of Capriles-Lopez, as it is customary in Venezuela to use first the last name of the father and second the last name of the mother. Although Michu is the youngest of the seven (7), due to the fact that he was very close to MACA, he was very close with the business affairs of the Capriles Family. After MACA´s death, Michu has played a very important role in the decision making process of the Capriles-Lopez. As a matter of fact, most of the time Michu has orchestrated the actions and used the Capriles-Lopez cash flow of the Cadena Capriles to fund all the litigation and related actions against the Capriles-Cannizzaro in order to retain control over the Cadena Capriles.
- MACA and Carmen Cecilia López Lugo separated as a married couple in 1967. However, formally, the First Marriage lasted until 1980 for over 41 years. In 1980, after 13 years of factual separation, they finally divorced. At the time of this divorce, MACA had an important fortune. Under Venezuelan law, filling for a divorce generates two separate legal consequences: (i) first. A “separación de cuerpos” (body separation), meaning that the couple, although not yet divorced, are released from complying with the marital obligations imposed by law, and (ii) second, de separation of assets, meaning that (y) the contribution to the marriage community ceases, and (z) that the existing marriage community has to be ascertained and liquidated.
- After their divorce from the First Marriage, MACA and Carmen Cecilia López Lugo made a liquidation of the First Marriage Community (“liquidación de comunidad de gananciales”), for which she received a considerably number and valuable assets while he kept an important number as well.
- In 1980, MACA married Magaly Cannizaro (the Second Marriage). This Second Marriage was also celebrated without “capitulaciones matrimoniales” meaning that the spouses to the Second Marriage started to contribute to the Second Marriage Community from the day of the marriage.
- Miguel Angel Capriles Cannizaro (henceforth MACC) was born before MACA and Magaly Cannizaro got married. As with Michu, MACA had an excellent relationship with MACC. MACA always tried that both sides of the Capriles Family got along; he was successful in doing so while he was alive; just from the moment that he was about to die everything changed among the Capriles Family, MACA was no longer available to equilibrate the Capriles Family. Due to the fact that MACA had a relationship with Magaly Cannizzaro before they got married and owing to the fact that MACC was born even before they got married, both Magaly Cannizzaro and MACC had to face the discrimination and insults from the Capriles Lopez for many years; this is especially true after the death of MACA.
- Since 1980 MACA increased his fortune significantly. In principle, since he liquidated the First Marriage Community with Carmen Cecilia López Lugo, thereafter, the Second Marriage Community grew with Magaly Cannizzaro on his side as co-owner.
- Even before 1980 MACA managed his affairs with Magaly Cannizzaro actively on his side. He also had on his side, both Michu (the older boy) and MACC (the youngest); both were well trained by MACA.
- In early 1996 MACA gets very ill. Since the Capriles-Lopez and the Capriles-Cannizzaro did not get alone -despite MACA efforts to the contrary during his life- three days before his death (when doctors announced his weak medical situation), and considering that he had a loving and harmonious relationship with the Capriles-Cannizzaro, the Capriles-Lopez were terrified to loose control over the assets of the family. Michu knew how to run the business and did not want to share it with us.
The fraud by which the Capriles Lopez acquired control of Vadesa and the other corporations (owner of 13% of stock of EDC) and the decisions of the Venezuelan courts which gave this control allowing it to stand until now.
MACA held at his death in 1996, all the stock of Valores y Desarrollos Vadesa S.A. ("Vadesa"), among other companies. Under Venezuelan law, 50% of MACA's assets – which included half of the Vadesa shares -- were owned by Magaly Cannizzaro de Capriles ("Magaly"), the other 50% constituted MACA's estate which was to be divided in equal shares among his eight children and his widow, (i.e., one-ninth of the 50% to each). As noted MACA had seven children from his first marriage to Carmen Cecilia Lopez Lugo (" Lugo"), who was divorced from MACA in 1980, following a property settlement in 1979. MACA married Magaly in 1980, and I am his son from that marriage.
Carmen Cecilia López Lugo waited sixteen years after the divorce and property settlement, until MACA was on his deathbed and when he was expected to die, literally, at any moment, she filed a complaint against him alleging that sixteen years ago she had not received 50% of marital property which was due to her at the time of the divorce, and that therefore, she was entitled to 50% of the property that he held in 1996. The filing of this claim sixteen years later and while my father was dying, was a first step in a scheme to obtain a default judgment on her claim against my mother as follows:
- Carmen Cecilia López Lugo knew that when MACA died, which predictably happened within two days after she filed her complaint against him, Michu and her other six children would become defendants in her action together with the widow (my mother) and myself.
- Carmen Cecilia López Lugo was ostensibly represented by one law firm (Brewer); and six of her seven children were ostensibly represented by another law firm (Viso) that purported to be opponents of their mother Carmen Cecilia López Lugo; and Lugo's seventh child was ostensibly represented by a third law firm (Aguilar), purporting in turn to be opposed to her six siblings. But, in fact, documentary evidence establishes that the Viso firm prepared pleadings to be used by Lugo and the seventh child who were the ostensible opponents of Viso's clients. This included Viso's preparation of a complaint filed by Lugo . Thus, documentary evidence shows that the three law firms pretending to represent opposing interests, in fact colluded to obtain a default judgment for Lugo by the above concealed collusion, including the following procedural fraud.
- Under Venezuelan procedure a defendant cannot properly file an Answer to a complaint until there appears in the court file an entry that the last defendant had been noticed, which usually is evidenced by an attorney's filing a power executed by the defendant in question authorizing the lawyer named in the power to appear for that defendant. While Viso had the powers from all six Lopez children in mid-June, it filed them only at intervals, and filed the last of the six powers (from daughter Adelaida -- whose power was executed on June 6, 1996 -- only on September 17, 1996 never having mentioned Adelaida's name in any of its prior filings in the case. The September 17 filing signaled that we then had the right to file our Answer. My mother and I thereupon being correctly led to believe by the September 17 filing that we then had the right to file our Answer, filed our Answer well within the 20 days after the September 17, 1996 filing of Adelaida's power, that the court establishes, asserted factual and legal defenses against Lugo's claim, including that it was barred by the 1979 property settlement and by more than one applicable statutes of limitations.
- But, the Brewer office moved for a judgment by default, and the trial judge granted to Lugo a default judgment, and refused to consider the Answer filed by my mother and myself, on the stated ground that our Answer to Lugo 's sixteen-year-old claim was filed six days late. This default judgment gave Lugo and Lopez control of corporate assets of some $700 million, (including Vadesa's $300 million). However outrageous such judgment would be had the Answer really been six days late, the lateness argument was itself the product of the fraud and collusion between Lugo and Lopez and their attorneys. (See next paragraph)
- A Viso lawyer (Solorzano), requested on July 11, 1996 , a copy of a document from the court file, which under the law she could only request on behalf of a defendant whose power authorizing her to act for that defendant had already been filed in court. The powers of three Lopez defendants, naming Solorzano as their authorized attorney, had already been on file with the court. Solorzano therefore had the right to ask for a copy of a document from the court file, by stating that she did so acting on behalf of those Lopezes. But, Solorzano used a tricky expression stating she was requesting the copy "on behalf of the 'Lopez defendants.'" This tricky reference was the basis of the colluding Brewer firm to move for a default judgment untenably arguing that the 20 days from which the time to answer started on July 11, and not September 17. Although my mother and I had no way of knowing before the September 17 filing of any appearance of Adelaida's, in any manner whatsoever, the trial judge adopted the fraudulent July 11-date argument, and granted Lugo the default judgment which was in all events totally indefensible. A default judgment could only be granted if all defendants defaulted, and of course since the seven Lopezes were in collusion with their mother, all of them did not file their Answers within 20 days after July 11 in order for Lugo to obtain the default judgment. (The judge who granted this default was subsequently dismissed with the largest number of charges of misconduct (in other matters) filed against any judge in Venezuela .)
- On appeal, the presiding judge of the court was the father of Solorzano, the lawyer who was charged with perpetrating the July 11 trick in the court below. He refused to recuse himself, and did so only when another unbelievable chicanery insured the outcome of the appeal:
- Opposing parties are allowed to elect to have the decision made by one appeals court judge, and two non-judicial panel members sitting with the one judge, one panel member to be appointed by each opposing party. Disregarding the fact that the Lopez children were, in fact, arch opponents of my mother and myself, because they and we were lumped with them under the heading of "co-defendants," they -- as the majority of the "defendants" -- were allowed to opt for the panel procedure, and to appoint both panelists, making it a certainty that this stacked appeals panel would not disturb the default judgment.
- On appeal to the Supreme Court, Civil Division, a majority refused to review the matter on the stated ground that that court had the power to review a judgment of the trial court, in this type of case, only if the trial judge passed on contested issues; and since here the judge did not consider the Answer (due to the alleged six-day lateness) he never passed on any contested issue. And, so over the vigorous dissent of one judge that this not only was not the law, but if it had been it would violate the Constitution as depriving my mother and myself of due process by giving us no chance to defend, the default judgment was left undisturbed.
- At the outset Lugo asked a court whose jurisdiction was limited to the equivalent of $8,000 to find facts which would decide ownership of some $350,000,000 and control over some $700,000,000 of assets. The Court did so, and its action though initially reversed was ultimately affirmed on the obviously untenable ground that the $8,000 jurisdictional limitation on the power on that Court related only to the limit on the amount of the judgment which this Court had power to grant; but this was not applicable to a declaratory judgment seeking no monetary award but only finding of facts. That the facts sought to be found by this court with an $8,000 jurisdiction were to be applied to a controversy involving hundred of millions of dollars was held to be of no moment by the then Venezuelan court.
- In spite of additional actions which my mother and I brought to set aside the default judgment on the grounds of fraud, not a single court passed on the merits of Lugo's claim, or on the merits of the charge that the alleged six-day lateness in filing the Answer was fraudulent.
Siphoning of funds: Cadena Capriles Pillage carried out by the Capriles Lopez family after the judgment declaring the Capriles Cannizzaro’s implied confession
Shielded behind the judgment declaring Magaly and MACC’s implied confession, the Capriles Lopez family held shareholders meetings related to Cadena Capriles companies and stared to systematically misappropriate funds in the inherited equity summing up to more than SIX HUNDRED FIFTY MILLION DOLLARS (US$ 650,000,000.00), through multiple thefts. Between 1996 and 2006 at least the following embezzlements have been carried out:
1) Valores y Desarrollos , S.A. (Vadesa) held an account in Lehman Brothers Inc. (number 832 22298 19 502) showing money placements ranging near US$ 11,564,268.82 besides a similar amount in negotiable instruments, i.e., a sum exceeding US$ 23,000,000.oo has vanished.
2) Valores y Desarrollos , S.A. (Vadesa) held certificates in Banco Mercantil Venezolano, N.V exceeding US$ Seventy Million (US$ 70,000,000.oo). There is not even a trace of these funds.
3) Inversiones Capriles , C.A. held money placements in Merrill Lynch, summing up to US$ 21,185,039.00 as of May 1999; by June 1999 a US$ 15,000,030 withdrawal made such drop to US$ 6,182,000.56; and by July the account balance showed US$ 0.81 dollar cents.
4) Valores y Desarrollos S.A. (Vadesa) investments in Banco Provincial Overseas N.V summed up to US$ 37,966,895.oo as of August 1999. Yet such amount cannot be found at this date.
5) The spurious administration the Capriles Lopez have been carrying out with their mother in companies pertaining to Cadena Capriles performed a divestment operation regarding Four Hundred Seventy One Million Nine Hundred Eighteen shares ( 471,918,000) of C.A. La Electricidad de Caracas valued in more than Two Hundred Sixty Nine Million Dollars (US$ 269,000,000) or One Hundred billion Bolivares (Bs.100,000,000,000.oo) owned by Valores y Desarrollos Vadesa, S.A. Such shares represent Valores y Desarrollos, S.A. (Vadesa) 81.7% capital stock which was sold to US bank Brown Brothers Harriman & Co. by the Capriles Lopez and their mother who are currently administrating Cadena Capriles companies in an illegitimate way.
6) In addition, the Capriles Lopez have contracted billionaire indebtedness through the group companies, as they are aimed at systematically sustaining their insolvency, with detriment to Magaly and MACC.
Here we must point out that these are just some of the multiple actions carried out by the Capriles Lopez to embezzle these companies; and we must warn that they are currently planning to divest 13% Banco Mercantil shareholding from Valores y Desarrollos, S.A. (Vadesa); an asset they intend to rob with similar purposes. In fact, they have already sold, more than 30,000,000 Banco Mercantil Class “B” shares converting proceedings thereof into ADRS, so only Class B shares in that Bank are left, and they will be probably robed within the shortest term.
We should also add that neither Magaly nor MACC have seen one cent of such monies, as the entire inherited equity is in Cadena Capriles companies, and all of them are controlled by the Capriles Lopez and their mother. They have just failed to state dividends and are engaged in bleeding those companies through the most shameful ways, because that will allow them to have such funds -exceeding US$ 650,000,000- directly in their hands.
The Fraud in Vadesa with the EDC shares using the US stream of commerce
Due to the a series of transactions, the non controlling shareholders (Capriles-Cannizzaro) of Vadesa (a family holding investment company) have been severally damaged for the unfair disposal of Vadesa’s interest in EDC (consisting on 13,6% thereof) by the Capriles López, wrongfully acting as controlling shareholders of Vadesa.
The first sale was made under the administration of the controlling shareholders (Capriles López, through Miguel Angel Capriles López, “Michu”, President of Vadesa) for US$158MM to BBH.
Although it is still under judicial determination in Venezuela whether or not the Capriles López have legal control over Vadesa, even if they had rightful control of Vadesa they appear to have committed fraudulent transactions against the Capriles Cannizzaro.
We need to evaluate whether the facts associated with these transactions provide any right of action and remedies on behalf of the affected non controlling shareholders, the Capriles Cannizzaro.
We have reasons to believe that the Capriles López may have incurred in fraudulent use of the Venezuelan and US capital markets, the US stream of commerce and territory, and may have used information unavailable to other shareholders of EDC. This tends to indicate that the usage of said information that shares of EDC will increase in value was the base for the Capriles López to divest the assets of Vadesa at the minimum value possible by selling them out of the scope of Vadesa, and then effectuate the final sale to AES under a tender offer at a higher value. We need to evaluate, even if that scheme is legal, whether it was to fraud the Capriles Cannizzaro as non controlling shareholders of Vadesa.
Keep in mind that when Vadesa sold the 13,6% in EDC to BBH, BBH did not paid for the price at the moment. We have important letters crossed between Vadesa and BBH indicating that since Vadesa had decreed dividends to its shareholders BBH was to deliver the price for the shares directly to Vadesa’s shareholders and not to Vadesa. Note, however that (i) Vadesa had never celebrated an extraordinary shareholders meeting to decree dividends, as required under Venezuelan law, and (ii) even if it had had done so had never distributed dividends to the non controlling shareholders of Vadesa. In other words, not only did Vadesa sold for a very low price but also Vadesa did not distribute dividends to the Capriles Cannizzaro.
In our opinion, since most of the transactions referred to in this brief occurred in NY, it would be impossible for the Capriles Cannizzaro to obtain relief or simply evidence in a court different than a NY court.
The referred series of transactions and acts include, but are not limited to the following steps:
The sale on November 30th, 1999 by VALORES Y DESARROLLOS VADESA (Vadesa), a Venezuelan corporation, represented by Michu as President with full powers (although said control is still disputed at the Venezuelan Supreme Court level –as a matter of fact, a Superior Court in Caracas has declared that the shareholders meeting in which Michu was appointed as President (with powers to sell Vadesa´s assets) and other members of the Capriles López family and related persons were appointed as members of the Board of Directors is null and void) of its 13,6% equity holding (471.970.118 shares) in EDC to BROWN BROTHERS HARRIMAN & CO. (BBH) for a price of US$158,000,000. This acquisition was made under rare circumstances (low price, T+0, no payment at the moment, no public bid, among others) in the Caracas Stock Exchange, at the lowest price for the share during the two years prior to the transaction, at a moment when EDC was perceived as a takeover target due to the low price of the shares. The Capriles Cannizzaro were able to notify BBH of the “weird” circumstances surrounding this transaction; still the notified parties celebrated the same. It appears to be strong evidence that the value of this participation was to increase due to a potential Public Tender Offer. Note that by the time of this sale the Capriles López and specially Michu had had entertained several conversations with different potential purchasers of EDC (including of course AES the final buyer). As a matter of fact, during two (2) years prior to AES s acquisition of EDC, EDC Board of Directors (including Michu as a member and his lawyers as lawyers of EDC as well) was preparing itself to protect its shareholders from a hostile takeover. Michu knew that US$158MM for 13,6% of EDC was low.
The conversion on December 29th, 1999 by BBH of said Shares into ADSs (some 9.439.402 shares in two blocks of 4.719.701 ADS each, @50 shares per 1 ADS) through the Banco de Venezuela and the Bank of New York. Note that the lawyers for Banco de Venezuela are the same lawyers of EDC, of Michu, of the Capriles López.
The transfer (in NY outside of Venezuela) of said two blocks of ADSs by BBH to two special purpose vehicles incorporated by the Capriles Lopez -a few days before the transaction- as BVI entities indirectly owned and controlled by the Capriles-Lopez, but completely unrelated to Vadesa: 4.719.701 ADS for Allied Capital Investment Inc. (Allied), and 4.719.701 ADS for Power Eagle International Ltd. (Power). These companies have a relationship with Gustavo Mata Borjas, an attorney hired by Michu just for purposes of the incorporation of these companies and to execute the purchase from BBH and the later sale to AES.
The final tender of said two blocks of ADSs by both Allied and Power, respectively, to AES in June 12 2000, under a Public Tender Offer (which was a global offer covering both the Venezuelan securities (shares) and the US securities (Level I ADS)), for an amount in excess of US$269,000,000 (a US$111,000,000 difference in value compared to the US$158,000,000 supposedly to be received by Vadesa, to be received by Allied and Power (ie.the Capriles-Lopezes), in detriment of the Capriles-Cannizzaro). We assume that this money was delivered to the two special purpose vehicles of the Capriles López, although there is a slight possibility that BBH has held that money as a consequence of the multiple warnings received from the Capriles Cannizzaro. Note that these vehicles were indirectly owned and controlled by the Capriles López and are their alter ego for purposes of receiving the additional US$111,000,000. Note that most likely, of the US$269,000,000 received, some US$158,000,000 were to pay to Vadesa and the rest for the pockets of the Capriles López (off course less the relevant attorney fees and related expenses). There is an important fact that needs to be evaluated: during the takeover process by AES of EDC, in principle Vadesa no longer was de shareholder of the 13,6% of EDC, it was either BBH or the two (2) BVI companies the owner of said shares. Notwithstanding the foregoing however, and as evidence that the real owner of said shares were the Capriles López, Michu ordered that these shares voted against an EDC proposal of a share repurchase plan during the takeover period (George Soros also voted against). In other words, even after the 13,6% stake in EDC was no longer in the apparent control of Vadesa, Michu maintained control thereof.
Distribution of the US$270MM. It is important to determine, whether the Capriles-Cannizzaro as non controlling shareholders of Vadesa at the time of the sale by Vadesa to BBH have any right of action against the Capriles López as controlling shareholders of Vadesa, and/or their legal advisors, and/or Michu as President of Vadesa -and intellectual author of the scheme to defraud the Capriles Cannizzaro, and/or EDC (or their legal advisors), and/or BBH, and/or the Bank of New York (or the Banco de Venezuela), and/or the BVI companies (or their representatives or legal advisors) and/or AES, considering that the final result of the scheme implies that the special purpose vehicles controlled by the Capriles López in detriment of Vadesa and the non controlling shareholders thereof, received an amount of US$269,000,000, US$111,000,000 in addition to the US$158,000,000 that Vadesa should have received from BBH.
In parallel, by using its power and control of Vadesa, on September 10th, 1999, in preparation for this fraud, the Capriles López (i) extended the already expired term of the company, (ii) amended the by laws of Vadesa allowing the President and the board of directors thereof to dispose income as advance dividends to the shareholders, (iii) approved any disposal of assets done on behalf of shareholders, (iv) approved financial statements, (v) decrees a dividend. Notwithstanding the foregoing however, the Capriles Cannizzaro have received nothing in dividends.
As a matter of fact, neither the Capriles López nor Michu (neither any of the persons involved in the scheme) could be characterized as stupid businessman for which we have reasons to believe that the main reason for the scheme was to take away US$111,000,000 from Vadesa; a misappropriation. Note that as to this date, the non controlling shareholders of Vadesa have no information with regards the whereabouts of the US$158MM that BBH should have paid to Vadesa.
Furthermore, as to this date, the Capriles Cannizzaro (i) have never received dividends from Vadesa after the sale to BBH (Vadesa should have received US$158,000,000), (ii) could never benefit from the additional US$111,000,000 received by the two special purpose vehicles of the Capriles López. If NY has no jurisdiction over this scheme, the Capriles-Cannizzaro will never have the opportunity to attack this fraud.
This is especially important if it can be evidenced that all the transactions that resulted in the final sale by the BVI companies to AES were accomplished following direct instructions issued by Michu and the Capriles López, using the US territory and stream of commerce, acting initially indirectly through BBH and then through the two special purpose vehicles (BVI companies), against the interests of Vadesa and other shareholders of EDC that had no access to the information that Michu had. But for this scheme, the shares of EDC would have had remained in the patrimony of Vadesa and sold directly to AES for the US$269,000,000. can the Capriles López go away with this scheme just like that?
This determination needs to take into account, at least the following circumstantial elements:
The Capriles López, specifically Michu, as controlling shareholders of Vadesa were also insiders of EDC (members of the Board of Directors), and actively participated in the entire process of sale by EDC,
Since 1998 EDC was preparing to protect itself from a hostile takeover. Michu and MACC well knew about this; Vadesa had a 13,6% interest in EDC worth hundred of millions of dollars. As a matter of fact the legal advisors for Michu and the Capriles-Cannizzaro are the same legal advisors for the EDC during the defense process.
It made no sense to sell the shares of EDC under the terms that Michu did as President of Vadesa in November 30th, 1999 in light of the circumstances. Obviously, a well prepared businessman must have had a different plan in mind to do this.
Under the circumstances, it seems that BBH acquired the Shares, not for its own interest, but for the exclusive benefit of certain clients (either the alleged controlling shareholders of Vadesa, the Capriles-Lopezes, or the two BVI companies, which are also owned and controlled by the Capriles-Lopezes), and with the intention to defraud the Capriles-Cannizzaros by misappropriating the proceeds of the second sale to AES Corporation, executed in New York, through a Public Tender Offer.
Moreover, this mere fronting and the fact that BBH did not purchase the EDC shares for its own interest, is also inferred from an uncommon account mention in the Statement of Condition, dated September 23th, 2002, published by BBH in its web site, www.bbh.com, named “Federal Funds and Securities Purchased Under Agreement to Resell”. It is of the essence to understand in which capacity was BBH acquiring the Shares.
Contrary to the belief, there are substantial contacts with NY to sustain an action in NY. If the Capriles-Lopez and Michu accomplished all of these transactions in NY then they should be scrutinized under NY law.
Michu was a Director of EDC because Vadesa had 13,6% of EDC. As a matter of fact, the Capriles (through Vadesa) was the largest –if not the largest- individual shareholder of EDC.
Any and all potential bidders for EDC spoke in more than one occasion with Michu with regards to the 13,6% stake in EDC; they also established contact with MACC and/or Magaly because every one knew that they were also “owners” together with the Capriles López. AES did establish contacts with Michu months before the initial offer in April 2000.
As a matter of example, one of the most important individual shareholders of EDC after Vadesa was Mr. Melchor Perusquia, holder of 4% of EDC. We have an affidavit from Mr. Perusquia stating that on April 28th, 2000 , the date in which AES made the first bid for EDC, he called Michu over the phone to ask him some questions about what the Capriles were going to do with their stake in EDC. At that time Michu recommended Mr. Perusquia to tender his 4% and said that the Capriles Family was to tender its 13,6%. Note that this conversation was held after Vadesa sold said participation to BBH. Why was Michu involved in this process? The only explanation is that he had an interest in the two (2) BVI companies that acquired from BBH and tendered to AES. .
Note however, that even though Michu was making this recommendation to Mr.Perusquia, he voted as a director of EDC not to approve the bid of AES in furtherance of a higher bid. Obviously he had information that no one had, and had 13,6% interest not under his name but under the name of Allied and Power. We have a copy of the affidavit.
The Capriles-Cannizaro warned everyone of the scheme. Vadesa however, argued that any third party dealing with Vadesa was doing so in good faith and that Vadesa will respond (indemnity) for any claims of third parties; who would say no to Vadesa? All the persons that received warnings from the Capriles-Cannizzaros did not wanted to cause damages to Vadesa for stopping what Vadesa was arguing as a completely legal transaction.
If Vadesa sold to BBH in an arms length transaction, why did Michu remained as director of EDC up until the final sale to AES in June 12th, 2000 if the shares were sold by Vadesa in November 30th, 1999, why did not BBH appoint a Director? Why did the Capriles-Cannizzaro, who were also Directors in EDC remained as Directors thereof? Why neither Allied nor Power appointed said Director? Why did people contacted Michu to find out what was he planning with to do with the shares?
At all times until June 12th, 2000 any person that wanted to discuss about the 13,6% of EDC needed to talk to Michu, notwithstanding the fact the holder in record of the shares was the Bank of New York and that the holder in record of he ADS representing that percentage were Allied and Power. From what origin did these companies obtained the money to pay BBH for the ADS? As we understand, there is not such a thing as a free lunch; however, Allied and Power had several.
Testimony of Francisco Javier Peón, which can be obtained through a requested deposition. Mr. Peón is a lawyer of Spanish nationality who presently is one of the seven counselors of the Administrative Council of the Spanish National Energy Commission. From 1999 to July of 2000, he was a Director of EDC nominated by Endesa , S.A. After the AES Public Tender Offer was announced, Mr. Peón, in his capacity as Director, held several meetings with Michu to discuss the possible sale of the shares owned by Vadesa to Endesa , S.A. In the first meeting, Michu confirmed that he controlled the 13.6 shares of EDC, previously owned by Vadesa and that they were available for sale. In another meeting held at Michu’s house, with the Delegate Counsel for Endesa International, D. Alfredo Llorente, who came from Spain, Michu offered to sell Vadesa’s 13.6 percent stake in EDC to Endesa. As a final detail of the last meeting, Michu imposed as a condition to his sale offer to Endesa, that the offer could never be mentioned to the Capriles Cannizzaros. At this moment, we are trying to obtain an affidavit with the above testimony. Note that all of these meetings were held after the sell of the Shares but before the AES public offer. We have copy of the projected affidavit.
Testimony of José Tomas Carrillo-Batalla, which can be also obtained through a requested deposition. Mr. Carrillo-Batalla is a lawyer of Venezuelan Nationality. He also has an M.B.A. from Babson College and a Master Degree in law form Harvard University . Presently, he is a director of CNI Asesores Financieros, CNI Securities and CNI Mercado de Capitales (CNI). On or about January 30 th, 2000 , Michu hired CNI to find a suitable buyer for approximately 472 million shares of EDC (the same shares that were no longer under Vadesa nor under the Capriles-Lopez’s patrimony?). Michu explained to Mr. Carrillo-Batalla, that in spite of the sale of Vadesa’s EDC shares to BBH, he continues to hold the control of such shares. Also, Mr. Gustavo Mata Borjas, Michu´s attorney for this transaction, sent a letter to CNI in which he explained that the EDC’s shares were transferred by BBH to Allied Capital Investment Inc. and to Power Eagle International Ltd., both British Virgin Island companies, that belonged to the Capriles Lopezes. Finally, Michu refused to pay CNI fees, despite the work done by CNI, because the shares were sold in a Public Tender Offer to AES. We have copy of the projected affidavit.
At all times during 1999 and 2000, Michu, his legal advisors and family members, had extensive knowledge of important information and knew that the price of the EDC Shares on November 30, 1999, date in which the shares were sold to BBH, was going to raise significantly, as it did in fact, due to the global tender offer to be made by AES or even by any other bidder.
At the time of the sale to BBH the price of EDC was the lowest during the previous two years, for which EDC was a perfect target under a tender offer.
When Vadesa sold to BBH in the Caracas Stock Exchange, some issues came to our attention:
- The transaction was a “cruce”, meaning that there was only one broker that had a seller and a buyer for an agreed price. As a matter of fact, Vadesa and BBH agreed five (5) transactions or “cruces”. None for these five (5) transaction was over 100,000,000 shares each; is there a reason for that?
- Under Venezuelan law, The Director of the Stock Exchange (of the floor) has to check that a “cruce” is in fact a fair transaction and has to announce the transaction to other brokers. This is so important that any other offeror may get through if it offers a better deal (over 20%).
- However, in the certificates issued by the Stock Exchange and the filings made by buyer and seller there is no evidence that these requisites were complied with. We have reasons to believe that the Capriles-Lopez managed to circumvent this requirement.
- The broker to the transaction was Broker No.45 LA PRIMERA CASA DE BOLSA, of the Caracas Stock Exchange, at the time directed by Carlos Acosta (head broker), best friend and neighbor of Michu.
- A “cruce” normally settles a few days after it is cleared. However, in this case, Vadesa and BBH agreed T+0 for all the five transactions.
- Note that it would have been perfectly legal that Vadesa could have planned and structured this transaction in order to sell ADS instead of shares when the tender moment arrived. In this case, however, this was just to squeeze Vadesa in detriment of the Capriles-Cannizaro.
- Normally, the buyer needs to advance payment to the Stock Exchange who transfers the funds. In this case, although the agreed T+0, BBH never paid for the price. We are investigating whether this is a normal situation under Venezuelan law.
- To support the above, we have an authenticated letter from Michu to BBH a few days after the transaction was closed and the shares transferred stating that 50% of the proceeds of the sale should be delivered by BBH directly to Carmen Cecilia Lopez Lugo, the mother of Michu and who the Capriles-Lopez sustain is a shareholder of 50% of Vadesa, which is still a fact that has not been resolved by a Venezuelan court (it is still pending).
- Since BBH did not pay the price on November 30th, 1999 (although Vadesa and BBH declared in their respective filings that payment was to be accomplished in that day, as a matter of fact a special withholding tax of 1% occurs on that same date as a condition to settle, that is in fact the tax benefit of using the stock exchange, otherwise the withholding is for 5%), we assume that BBH was waiting for the Capriles López instructions as to payment instructions and/or waiting for their funding in order to be able to pay Vadesa. It is necessary that BBH discloses who was the BBH client behind this transactions: was it Michu, was it the Capriles-Lopez, was it Allied and Power, was it Gustavo Mata-Borjas, Michu´s appointed attorney for this transaction, was Michu defrauding the other Capriles-Lopez as well?.
- Another important fact is that BBH did not paid the purchased price to Vadesa, as expressly mentioned and required by the Sale Execution Orders to the Caracas Stock Exchange. These orders establish that the full purchased price had to be paid to Vadesa the same day. However, evidence shows that the purchased price was never paid to Vadesa. Therefore, the funds allegedly used by BBH to buy the EDC shares did not come from BBH. We have English translation of the copy of the notarized letter dated December 13 th, 1999, sent to BBH by Michu as the President of Vadesa, indicating that the Board of Directors had decided to give Carmen Cecilia López Lugo, as anticipated dividends, half of the credit that Vadesa had against BBH for the unpaid purchased price of the EDC shares. We also have copies of the Sale Execution Orders to the Caracas Stock Exchange for the 471,970,118 shares of EDC and an English translation of the relevant aspects of the forms.
For months (before November 30th, 1999 ) EDC had been considering several protections tactics in preparation for an expected hostile takeover. During that time several potential buyers approached Michu to offer a purchase of Vadesa’s interest. It is clear that if Michu could get those shares out of Vadesa’s patrimony before the big sale to AES it would not had to share the benefits of the big sale with the Capriles-Cannizzaro. The problem is that they made too many mistakes in the implementation of their plan.
It seems that Michu could be held responsible under the business judgment rule and a violation of a fiduciary duty. However, we think that by the use of the US markets Michu and the Capriles-López simply defrauded the Capriles-Cannizzaro far away from Venezuela .
The Capriles-Lopez maintained indirect control over 13,6% of EDC until said percentage was tendered to AES in June 12th, 2000 . All this information tends to disclose that the Capriles-Lopezes had information that helped them to set up a mechanism that not only allowed them to leave Vadesa with a lower price for the Shares compared to the price that the BVI companies received, but also it seems unfair for other shareholders of EDC that had no access to the same information handled by Michu. We could affirm that for this information, the Vadesa sale to BBH and the subsequent transactions would never had been structured in this manner.
The legal advisors for the controlling shareholders of Vadesa, and indirectly to Vadesa, were the same legal advisors for EDC during the tender process. They managed important information for EDC and were their advisers in the preparation of defense tactics in order to increase the offer by AES. They are also de attorneys for Banco de Venezuela (and one of them was even a member of the board of directors of said bank), the Venezuelan financial institution in charge of the conversion of Shares of EDC into ADS of EDC; that explains why the conversion from shares to ADS was made on such a fast track.
It is important to note that all of the attorneys that helped the Capriles-Lopez are very well known and respected attorneys in the Venezuelan bar; they write books, are active in court, participate in radio and TV programs, write columns for newspapers, etc. They belong to two of the most prominent and recognized law firms in Venezuela ; they are also famous for being flexible with regards corruption handling.
All these transactions occurred while the Capriles-Cannizaro were attempting to obtain jurisdiction over the Capriles-Lopez in NY to stop them from diverting several other assets (not only Vadesa’s stake in EDC). At the time, the court dismissed for lack of jurisdiction. Note, however that all of the elements referred to in this brief commencing with the conversion of shares into ADS (a US security traded in the US OTC market) by BBH (a US company) through the Bank of New York (a New York corporation) in NY city are recent and were never mentioned in the referred litigation. We strongly believe that as of December 1999, date in which the shares were converted into ADS in NY, all the transactions that complete the scheme were held in NY and the entire scheme was based in NY. The Capriles-Lopez felt comfortable that since they had dismissed the previous actions no one could ever review these transactions again (that is why they took no due care in implementing the scheme), we think that they were wrong.
It is necessary to evaluate whether these transactions could be considered in the aggregate and not individually as if they were held in preparation for the sale of the ADSs through a Public Tender Offer in New York to AES against the interests of Vadesa’s shareholders and/or shareholders of EDC.
Finally, it is important to evaluate whether BBH was an active party in these actions and whether these actions were fraudulent actions, because BBH continued and concluded the scheme in spite of the several notifications sent by the Capriles Cannizzaros, to Edward J. Williams, Treasurer and Compliance Senior Manager of BBH. Memorandum summarizing the issue were sent to BBH on December 1st, 1999, December 28th, 1999, December 29th, 1999, January 25th, 2000, April 28th, 2000, May 15th, 2000, June 2nd, 2000 and September 23rd, 2002.
Previous US Case. It is important to mention that in August of 1999, the Capriles-Cannizzaro commenced an action against the Capriles-Lopez in the Supreme Court of the State of New York, County of New York, in order to recover damages for the conspiracy committed by the Capriles-Lopez and its attorneys in Venezuela to illegally appropriate the assets of the family Corporations, which had assets of hundreds of millions of dollars, including but not limited to millions of dollars in cash and investments in accounts with Merrill Lynch and Lehman Brothers in New York, that rightfully belonged to the Capriles-Cannizzaro. In the action, it was alleged that the fraudulent scheme was possible because of the Venezuelan judicial corruption.
In general terms, the family Corporations belonged to the Capriles Cannizzaros, because Magaly Cannizzaro de Capriles was the wife of Miguel Angel Capriles Ayala, owner of the family Corporations, at the time of his death, and according to the Venezuelan law, she was entitled to half of her husband state and a similar portion as any children. However, Magaly and her son were deprived of their assets by fraudulent tactics committed by the Capriles-Lopez and theirs attorneys in Venezuela .
In the second amended complaint, which we understand was never filed, the Capriles-Cannizzaro intended to incorporate BBH and Mr. Dario Galindo as defendants, but the motion was never considered.
The case was decided against the Capriles-Cannizzaro for lack of jurisdiction. With regard to BBH, the court decided not to consider the second amended complaint because, in general, the Capriles-Cannizzaro did not allege facts showing that BBH committed a tortuous act in New York , which is being evaluated. This brief pretends to correct the previous litigation with new elements that arise in 2000 and that were never mentioned in that litigation. .
As general information, not related to the New York jurisdiction, it is important to mention that the Capriles Lopezes are not the rightful controlling shareholders of Vadesa. They obtained such control by fraud through a default judgment in Venezuela . At this moment, there is a decision pending at the Venezuelan Supreme Court that could correct the above situation. The controlling interest in Vadesa belongs to us, Magaly Cannizzaro de Capriles and Miguel Angel Capriles Cannizzaro (“Capriles Cannizzaros”). 55,55% of the shares of Vadesa belongs to Magaly Cannizzaro de Capriles due to a sixteen-year old marriage with Miguel Angel Capriles Ayala and MACA death intestate, and 5,55% to Miguel Angel Capriles Cannizzaro .
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