Brazil’s Expanding Credibility Concerns Make Investing a Risky Proposition

NEW YORK (TheStreet) -- Investors interested in taking a flier on Brazil equities that look cheap should take a closer look before investing. 

Last year, allegations surfaced that executives of Petrobras (PBR), the state-owned oil company, had bribed politicians involving more than $23 billion in government contracts. The allegations have engulfed Brazil's business leaders and senior politicians, including President Dilma Rousseff who served on the board of Petrobras. There is currently no evidence that Rousseff knew of the alleged kickbacks and bribery, but concern about the growing scandal has caused investors to decrease their holdings in the Brazilian companies involved in the morass. Earlier this year, Soros Fund Management reduced its holdings in Petrobras as its share price tumbled. Other financial firms, including Blackrock (BLK) and Fidelity Investments, also cut their investments as the investigation has dragged on.

Rarely is something like this a neat little one and done, rather there tend to be ripples that touch other companies. In the case of Petrobras, companies in the U.S. and other countries around the glove have been pulled in. In April, Huxley Capital Corporation filed a lawsuit in federal court against OAS SA, a Brazilian construction conglomerate that filed for bankruptcy after its executives were arrested as part of the Petrobras scandal. Meanwhile Petrobras' own investors are suing PricewaterhouseCoopers LLP claiming the auditor "ignored obvious red flags."

Investors are left wondering who else could get caught up in the ongoing probe by authorities. Alberto Youssef, known to authorities as Brazil's black-market central banker and money launderer at the center of the massive corruption scandal may have answers. Since his arrest in February, Youssef has been singing like a canary to prosecutors, accusing a host of government officials of accepting bribes. In addition to claims that President Rousseff and former President Lula Da Silva knew about the scheme, Youssef has alleged that Japan's Toshiba paid bribes to win contracts. Youssef has also accused credit-risk management services company GRV Solutions, a subsidiary of Cetip, Latin America's largest central depository for OTC and private securities and derivatives, of bribing the progressive party with as much as $10 million to secure a monopolistic contract with Brazil's National Traffic Department. Cetip's largest shareholder is Intercontinental Exchange, the owner of the New York Stock Exchange, Euronext and ICE Futures.

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