Jailed Brazilian banker sues Walkers

A former Brazilian banker, who is serving a 16-year prison sentence in her home country for conspiracy to commit crime, money laundering, tax evasion and mismanagement, is suing law firm Walkers in the Cayman Islands. 

Katia Rabello, principal shareholder and former president of Rural Bank in Brazil, claims that Walkers, acting for another client, obtained an information disclosure order while the firm still owed attorney-client confidentiality, contractual and fiduciary duties to her and other plaintiffs. 

The law firm’s alleged duty breaches resulted in the wrongful disclosure of confidential documents and information, which were then used “wrongfully,” according to the plaintiffs, “in proceedings before the Brazilian, United States, British Virgin Islands and Belize Courts as well as by the Brazilian Central Bank and the Brazilian press, thereby causing the plaintiffs catastrophic loss and damage.” 

Ms. Rabello was convicted in 2012 and jailed last year for her role in one of the largest political corruption scandals in Brazil. The “mensalão” or “big monthly payment” case was a vote-buying scheme in the Brazilian Congress between 2003 and 2005 that used public funds to pay bribes to politicians. Banco Rural was found to have issued fraudulent loans that guaranteed the monthly payments. Certain payments were allegedly routed through its affiliate Trade Link Bank in the Cayman Islands. 

Brazilian newspaper Folha de Sao Paolo called the Mensalão case in November 2013 the largest corruption scandal in Brazil, considering that it involved bankers and parliamentarians, officials of three parties, the president of the Chamber of Deputies and three ministries, including senior government officials under then-president Luiz Inacio Lula da Silva. In total, 25 people were convicted. 

Ms. Rabello is a plaintiff in the case, together with Cayman-registered firms Arnage Holdings Ltd., Brooklands Holdings Ltd., and East Farthing Holdings Ltd., and Fernando Toledo, a former representative of Cayman-based Trade Link Bank. 

In a writ filed in the Grand Court on Feb. 4, the plaintiffs say they engaged Walkers as their attorneys from 1985 to 2010. They claim that Walkers had failed to carry out conflict of interest searches before the firm acted for “a new client with interests directly adverse to the plaintiffs.” 

This “new” client, Afonso Henrique Alves Braga, a Brazilian trustee in bankruptcy, was represented by Walkers in 2010 and 2011 in a contested disclosure application that was part of a major multijurisdictional fraud investigation. 

Mr. Braga was appointed judicial administrator of bankrupt Petroforte group of companies by the Brazilian courts in 2003. He alleged that assets belonging to the bankrupt Petroforte Group had been stripped away by the former principal of the group in collusion with the Rabello family’s Rural Group. 

The alleged scheme involved Securinvest Holdings S.A., a Brazilian company, whose shares were held by Arnage Holdings and Brooklands Holdings in the Cayman Islands. In 2010, Mr. Braga obtained a court order in Cayman to confirm the beneficial ownership of the entities. He also commenced similar disclosure proceedings concerning Rural-affiliated entities and individuals in Florida, the BVI, Belize and Brazil. 

In 2011, Ms. Rabello and four related companies attempted to set aside an order for disclosure of confidential information concerning Arnage Holdings and Brooklands Holdings to Mr. Braga, who it was claimed had failed to protect the confidential information. 

The Feb. 4 writ states that Walkers obtained a “Bankers Trust” disclosure order – which enable defrauded parties to trace funds and potentially obtain freezing injunctions – in a way that was “premature, unjustified on the evidence and impermissibly wide.” 

It repeats the findings of Chief Justice Anthony Smellie in his 2011 judgment, who stated some of the confidential information obtained would not have assisted with locating and preserving the assets that had allegedly been diverted. 

In his judgment, the chief justice ordered the trustee in bankruptcy to move to seal the documents or remove them from public record in all jurisdictions where they were filed as part of related court proceedings. 

However, Chief Justice Smellie upheld a disclosure order to establish the true beneficial ownership of Securinvest to determine the involvement in the alleged fraud. 

The plaintiffs claim Walkers had not only failed to protect and preserve confidential documentation, but handed it over to the firm’s new client. By not disclosing to the plaintiffs the actions of the new client, Walkers had prevented the plaintiffs from taking pre-emptive steps to prevent the disclosure of the documents, the writ says. When contacted by the Caymanian Compass, Walkers said it had no comment. 

The information obtained in the Cayman Islands was filed with the courts in Brazil, which extended the bankruptcy of Petroforte to encompass Securinvest. This information and documents filed with the courts subsequently found their way into the press, which Ms. Rabello claimed in 2011 damaged her reputation and caused a run on her bank. 

Mensalão scandal 

It is not clear whether and to what extent the confidential information obtained in Cayman contributed to Ms. Rabello’s conviction in the Mensalão scandal. 

The scandal was one of the few times senior Brazilian politicians were jailed for corruption. José Dirceu, former government minister and chief of staff at the president’s office, who prosecutors said, together with the leaders of the Workers Party, bankers and publicists, had formed a “criminal organization” that used public and private funds to buy political favors, was sentenced to 10 years and 10 months. 

Defense lawyers for Ms. Rabello, 43, claimed that the former dancer and owner of a dance school had little experience running Rural’s operations when she took over in 2004. 

Her sister Junia Rabello, who was prepared by her father to lead the organization, died in a helicopter crash in 1999. Only after vice president Jose Augusto Dumont, who had run the bank since, died in a car crash in 2004 did Katia Rubello take over. 

Ms. Rubello’s lawyers argued it was Mr. Dumont who set up the fraudulent loan scheme and she merely approved the renewal of the loans. However, prosecutors pointed to the fact that she had met personally with government minister Dirceu, in a meeting set up by one of orchestrators of the bribery payments. 

It was not the first time that Banco Rural was the subject of investigations. 

The bank was scrutinized for maintaining “phantom” accounts under false names in 1992 as part of the bribery and kickback scheme operated by Paulo Cesar Farias, former Brazilian President Fernando Collor’s campaign treasurer. 

Banco Rural’s affiliate Trade Link Bank, which opened in 1985, was investigated by Manhattan District Attorney Robert Morgenthau and a Brazilian Joint Parliamentary Commission of Enquiry in 2003 in connection with a money laundering scheme involving the New York Branch of Banestado, the state bank of Parana, and a money remitter named Beacon Hill. 

In 2005, Rural bank saw its assets decline to a fifth of the original value as depositors took their money out of the bank. Although Rural bank was not a defendant in the Mensalão proceedings, the Central Bank of Brazil ordered the bank’s extrajudicial liquidation in August 2013 due to its poor financial situation and lack of viable plan to rescue the institution.  

Trade Link Bank was dissolved in a voluntary liquidation in 2007. 

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