Photo: Reuters

We have become inured to shocking allegations of corruption; each successive tale of speed-money, yachts and beauty pageant contestant girlfriends turns into a joke that can easily be a Chigüire Bipolar post.

But the latest twist, a recently unsealed lawsuit brought by a PDVSA-linked trust against several companies for a bribing scheme, is another level of mafia. Deeply-entrenched corruption has compromised basic operational safety of PDVSA, and the turf wars inside the company resemble more an episode of the Sopranos that the management of a major oil corporation.

The trust

The first shock is the plaintiff itself, something called “the PDVSA US Litigation Trust.”

PDVSA created a trust in New York to pursue litigation in the US arising from an alleged bribery scheme to rig oil tender sales. The mysterious trust is represented by the Boies Schiller Flexner LLP law firm, headed by legendary litigator David Boies. Boies has represented clients from Al Gore, Harvey Weinstein, and the New York Times, to one of the narcosobrinos (Ruperti writing those checks).

According to the trust agreement, disgraced PDVSA President Nelsón Martínez set up the trust on July 27, 2017; the trustees, i.e. the people managing the trust, are Vincent Andrews, Edward Swyer and Alexis Arellano. Andrews and Swyer were appointed by Boies Schiller Flexner LLP. Arellano is identified in the document as PDVSA’s General Business Manager. There isn’t much available information online about him, but an Alexis Arellano (identified as PDVSA former general manager in Ecuador) was indicted there for corruption charges. Adding to the confusion, another copy of the agreement produced by one of the defendants says the trust appointed Miguel Bolívar, PDVSA treasury manager (instead of Arellano), as trustee.

The lawsuit alleges the existence of a widespread sophisticated network of corruption in PDVSA for oil tenders and bids operating to this day.

The beneficiary of the trust is PDVSA, meaning that any funds recovered by the trust will be funneled back to the oil company.

Litigation trusts are widely used in bankruptcy proceedings, which would be fitting for a nearly bankrupt company like PDVSA — bankruptcy trustees create litigation trusts to collect money for debtors. But this is not the case, and you can bet the vultures trying to collect will fly as low as they have to, to get their hands on any settlement or judgment in the trust’s favor.

The biggest mystery is the story behind its creation. The lawsuit alleges the existence of a widespread sophisticated network of corruption in PDVSA for oil tenders and bids operating to this day. The lawsuit also alleges that PDVSA’s current VP, Ysmel Serrano, the most powerful man in the company, is part of it.

To my lawyer’s eye, this trust agreement is odd. It’s only signed by Nelson Martínez, citing his authority based on the Law on Public Administration. This is irregular and probably invalid: PDVSA is a corporation governed by common commercial law, and authorization from its board is usually needed for this type of contracts. Maybe the reason there’s no reference to the board is that the trust agreement was entered into behind their backs?

If PDVSA is behind this lawsuit, why the hell are the trust’s lawyers hellbent on proving how corrupt PDVSA and its main honchos are? Was Martínez out to get Serrano before his downfall?

The case

The suit alleges that two men by the names of Francisco Morillo and Leonardo Baquero incorporated a company called “Helsinge, Inc.” (and several other entities) to provide confidential information about PDVSA’s tender sales to several big buyers of Venezuelan oil under the guise of a consultancy firm. Under such scheme, Helsinge and its “clients” managed to rig PDVSA’s oil tenders and fix prices. Baquero and Morillo disguised the bribes and their own cut as “consultancy fees.”

PDVSA claims that several big traders who are defendants in the suit (Lukoil, Vitol, Glencore and Trafigura) participated in the scheme. The trust is also suing the Curaçao and U.S. banks used to funnel funds from the clients to the Helsinge group and its ultimate beneficiaries.

Boies obtained evidence by hiring a security expert who managed to get a hold of Morillo’s laptop from his estranged wife.

One shocking part is how the trust’s lawyers obtained their evidence. You’d think that it’d come from PDVSA’s own records or maybe from an investigation by the Venezuelan prosecutor’s office. But no Boies obtained evidence by hiring a security expert who managed to get a hold of Morillo’s laptop from his estranged wife.

From a review of this laptop, the expert claims he found out that Morillo, with the help of a complicit PDVSA employee referred to as the “Nerd”, set up a clone server of PDVSA’s Commercial and Supply Department server, which he could access remotely from the U.S. to obtain confidential information.

Boies also commissioned a report from an IT expert, who claims in his sworn statement that several PDVSA top officials (that he doesn’t name) flew him to Caracas in September and October 2017 to perform an audit of PDVSA’s servers located in their headquarters in la Campiña.

During his October visit, he walked the company premises incognito and inspected the servers to ascertain those corresponding to the Commercial and Supply department can be accessed remotely, something highly irregular for a big company. Not only that, he claims he also found out that PDVSA only stores emails in its servers for three months. He says he was kept from doing a fuller inspection by PDVSA’s security personnel, and the employees who are part of the corruption scheme.

PDVSA’s servers corresponding to the Commercial and Supply department can be accessed remotely, something highly irregular for a big company.

So, first, there’s a corruption network so entrenched that third parties can access PDVSA’s most sensitive data from abroad to enrich themselves without consequence. Second, there’s the shocking vulnerability of PDVSA’s technological platform (according to the IT expert, PDVSA has no disaster data recovery plans and backup functions within its network). And third, there are several factions in PDVSA vying to death for power, to the point that one faction can create a entity to sue past clients alleging that several active PDVSA employees (including its VP!) are crooks bleeding the company dry, with no one getting fired.

The case is ongoing and several defendants are already filing motions for dismissal. According to experts, this PDVSA case faces a lot of hurdles and the validity of the trust agreement has already been questioned by the defendants. I, for one, am left with much more questions that answers, but two things are crystal clear: a lot of fancy lawyers will get brand new BMWs out of this mess, and PDVSA is doomed under chavismo.

No Russians or army men can save a wretched company run like a criminal organization by untrained thugs.

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  1. I’m not sure who I’m supposed to cheer for? Is there anyone inside PdVSA that isn’t a criminal?

    Who is the good guy in the above story? I’m confused. Please, a short explanation of who ISN’T the bad guy?

    • Theoretically and legally, PDVSA “ISN’T the bad guy”. But what happens, and you see this worldwide, is that managers who had nothing to do with setting up the enterprise in the first place, and were hired employees, were compensated with shares of the corporation, and now think they own it.

      To clarify: the corporation has been legally ruled to be a legal entity, and it is jointly owned by all shareholders, by all who buy shares in it; the managers are given the job of operating the company to its best benefit, and thus to the best benefit of the shareholders. When those managers do not do that, and instead find ways to enrich themselves even at the expense of other shareholders, they are not doing their jobs and should be fired. As the article states: “… alleging that several active PDVSA employees (including its VP!) are crooks bleeding the company dry, with no one getting fired.”

      Maybe the confusion is that if the trust lawsuit benefits PDVSA, it goes to benefit the people who (allegedly) should be fired because they are not representing the corporation – a classic circular reference arising from the incorrect idea that managers ARE the corporation, and not just employees. Probably how it works out is that the suit will name those individuals as defendants, with any recovered money held in the trust, but the question comes up about the innocence of the people filing the lawsuit. More circular reference. Like the article says, the sure thing is that the lawyers will get paid – new wheels, even more circular reference. They think they own the law – as opposed to being its employees, representatives, shareholders, or whatever.

      Life is not a game of “I’m bigger than you, so eat it!” It is a game of finding the truth, and that’s another subject, but the law – all through history – is based on philosophy, good or bad.

  2. Venezuelan journalist Maibort Petit in her twitter and blog has great details about this legal action. I also decribed it in my blog:
    Morillo, one of the two owners of the company coordinating the fraud was an employee of Wilmer Ruperti and left him, apparently not on good terms. Morillo’s former wife was the person who gave Ruperti the information that Ruperti, in turn, delivered to the lawyers. There are no “good guys” in this mess. The lawyers are acting because they will get a percentage of the money recovered, if any, they are bounty hunters. PDVSA managers fed the information to the trading companies and received kickbacks. Some of the traders accused of wrongdoing, employed by Glencore, Vitol, etc, are Venezuelan and have mansions, some in the U.S. some in London. I mention one of them in my blog.
    The accusations might or might not prosper in court but there is no doubt that PDVSA is a cesspool.

    • The entire country of Kleptozuela is a filthy cesspool, Gustavo. PDVSA happens to be the biggest one, only because it had the most to Steal. Corpoelec, and every other big company is also a den of thieves, the mining industry too, the food industry, every industry in shambles is there to Steal. PDVSA is the Elephant in the Roon only because Kleptozuela didn’t produce anything else but oil.

    • From what I’ve been reading David Boies and Friends stand to get 2/3 of whatever gets recovered. We’re talking about billions of dollars here. Maybe back in April nobody knew this. And oh yeah attorney David Boies represented at some point one of the narco sobrinos

  3. Interesting article, but I needed to read it twice, at least. The final conclusion is that the best course of action for us is to privatize the oil industry as a whole, and ideally among many companies both local and from abroad

    • Right. There’ll still probably be some corruption there, but the idea is to begin cleaning it up with the age-old workability of private property.

  4. There is something odd for Pdvsa to sell its production in the form of ocassional or short tem shipments via the use of traders selected via bidding procedures , for Pdvsa the mandate was seek stable end customers (end users and refiners) who could be relied upon to take your product under a yearly contract ( renewable each year ) paying a price which took the form of a formula which varied according to the variation in the market price of certain basket of reference crudes and products which represented the general state of the market at any given time . The idea that Pdvsa would have to rely on a trader to sell its products to an end user or customer was absurd because it meant having to share the price which the final user or customer was prepared to pay with an intermediary which wasnt needed because over the years you had developed a stable relationship with a vetted roster of final users customers whose specific needs and requirements you were familiar with . The use of traders was only needed when the supply or market need was shortlived and you couldnt develop a market with the end users yourself….!! Why Pdvsa used this commercially costly and inefficient system to market its supplies itself begs a question !!

  5. When this Chavista movement fails the number one issue for Venezuela is to rationalize your oil industry in a way that permits honest governance. As long as the politicians control PDVSA Venezuela will be cursed with corruption. Who has a better idea for a post Chavista PDVSA. Think outside the box. The old ways proved unworkable. Try something new.

    • Try something old, like capitalism … prior to the disastrous 1976 nationalization. That requires guarantees of private property – and if anyone has any questions about what that means, it means that theft is illegal. Let “foreign interests”, that is, foreign capital, do whatever they did previously, bid for exploration rights, pay royalties and taxes on what they find and pump out of the ground, and make a profit on it.

      The socialist idiocy is that private property is bad, profit is bad, and so the individual good is bad, and must be sacrificed for the good of the group. Which means everyone, eventually, living an impoverished existence, complying with the will of the Privileged Individuals who dictate everything for everyone. Can everyone see the logical inconsistency there?

      • “Can everyone see the logical inconsistency there?”

        Yes. Look a little deeper. Socialism/communism/marxism/leftism has always been a vehicle to create elitists, to steal as much as is possible, and to destroy everything else.

        “…private property is bad, profit is bad, and so the individual good is bad, and must be sacrificed for the good of the group…” is merely propaganda to dupe and enslave the proletariat. The fact that the elitists love their private wealth (especially stolen wealth) explains the inconsistency. The hateful philosophy is merely a power vehicle. Didn’t Marx live out his life in luxury in Paris enjoying all the freedoms and rights he sought to take from others?

  6. I have not read a serious comment here about a post Chavista oil policy to put an end to the corruption. It’s a glaring oversight of this otherwise very good CC. Does Falcon or anyone else on the horizon have a proposal for the oil sector? How can Venezuela change without fixing this problem? Does anyone even care?

    • Bill Crispin – Not sure what you mean by serious comment, but to end corruption you put in guarantees of private property, as a foundation. An implementation of that would be the privatization of the oil industry, as Armando Rivas noted, above here on this thread. If you mean serious comment from the Venezuelan opposition, there are at least three or four proposals I have read recommending guarantees of private property, and an end to the guiso of various tiers of foreign exchange. If you mean serious comment as an article on CC, maybe an article that collected and summarized various proposals from leading opposition politicians and their advisors would be helpful. But “a plan” seems to not get much traction, while the subject of corruption and its ills is a fairly consistent (woeful) theme here.

      • Gringo…a country that fails as spectacularly as Venezuela has, needs serious reform. Serious reform must include the oil sector because of the rampant political corruption there. You and Atmando Rivas support privitizeation. Is there a political party or prominent poltician that supports privitizeation. I assume the answers to those questions are no and no. Is it more likely that any reform will be limited to insulating PDVSA from political interference. If this is the case, why would insulation work this time? I recommend that CC cover this topic and spell out the possibilities.

  7. From 1976 to 2000 (25 years) Pdvsa was a state entity run as a clean, highly efficient, very succesful private business by a meritocratic system that Chavez destroyed . once the meritocratic system was destroyed the new politically appointment management the company became increasingly incompetent , inept, corrupt ,
    inneficient ending in its ultimate total ruin that we witness today !! Even if the 4th republic wanst a perfect Pdvsa stockholder ( and did include some political considerations in the way it was run) Pdvsa during this period was considered in the international oil industry as one of the best runs business in the world …..this should not be forgotten , one of the reasons for Pdvsa s success was that the profit centre was in Venezuela and not abroad so that if it was cheaper for a foreign company to shut down production of a Venezuelan oil field because they could make more money opening a new one in Angola , that was not done …….
    In todays conditions however private business presence is a must , but so is the refounding of a Pdvsa which is meritocratic and business oriented in every respect and isolated from political partisan agendas and distortions , that means developing new business which harmoniously integrate private business and public BUSINESS interests and not seeing oil as a vehicle for the advancement of partisan politics that favour the popularity of those in control of government.. A new Venezuelan oil industry should be a state inside a state , like the prussian army of old ……., at least for purpose of serving the ECONOMIC interests of its stockholders inside and outside Venezuela … form any politically motivatd interferences….!!


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