JULIO PONCE LEROU has always mixed in high circles. He was married to the daughter of Chile’s late dictator, Augusto Pinochet; and was the boss of the country’s industrial-development agency, CORFO, until accusations of corruption forced him to quit in 1983. By the late 1980s Mr Ponce was in charge of SQM, a nitrate company with vast reserves of iodine, lithium and potassium in the Atacama Desert. He turned it into one of Chile’s most successful firms and became extremely rich in the process. This year, for the first time, Forbes magazine named him among the thousand wealthiest people on the planet, with a net worth of $2.3 billion.
But on September 2nd Mr Ponce suffered a setback. Chile’s stockmarket regulator, the SVS, fined him $70m for illegal share trading, the biggest single fine it has ever imposed. It also sanctioned seven of Mr Ponce’s associates, as well as the country’s leading stockbroker, LarrainVial. In all, the fines totalled a record $164m.
According to the SVS, Mr Ponce and his friends enriched themselves at the expense of other shareholders by buying and selling stock in holding companies that controlled SQM. They bought the shares cheaply at auction and then sold them back at above-market prices, pocketing the difference. They arranged the re-sales in such a way that third parties, who could have undercut them by offering market rates, were blocked from doing so. The losers, according to the SVS, were minority shareholders, including pension and investment funds, who saw the value of the holding companies diminish. This went on repeatedly for several years, the regulator says. It reckons the eight men made $300m from the scheme. Of this, the regulator claims $128m went to Mr Ponce himself.
The defendants say that the accusations are rubbish; Mr Ponce claims that he simply profited from a bull market between 2009 and 2011, buying shares cheaply and selling them on as prices rose. He says the charges are motivated by the bitterness of those who were not so canny, including Sebastián Piñera, a former president. “If his excellency, the president of the Republic, had not played a part in this case, there would be no case,” he declared after testifying before a state prosecutor in March. Mr Piñera was a minority shareholder in two of the holding companies, Norte Grande and Oro Blanco; they lost almost 70% of their value between 2009 and 2014.
This case is far from over. Minority shareholders in the holding companies, including the pension funds, are threatening legal action against Mr Ponce and his associates in a bid to recoup their cash. Mr Ponce’s lawyers say he will appeal against the fine.
Yet the case also has far more important ramifications. The scandal has tarnished Chile’s image as the least corrupt nation in Latin America, with a stockmarket to match. Hermann von Muhlenbrock, the head of SOFOFA, Chile’s biggest industry federation, described the case as “a serious threat to the transparency of the financial market”; foreign investors want to know they will not be swindled out of their money. The evaporation of confidence in Chile’s capital markets has already damaged the ability of some businesses located there to finance themselves. And trust in the country’s financial institutions has taken a blow. Only 21% of Chilean executives believe this was an isolated case, and 20% think it damaged the market’s credibility, according to a poll published on September 7th by Fondación Generación Empresarial, a corporate-responsibility group. Although 76% believe the regulator did a good job in pursuing Mr Ponce and his associates, 60% say it needs to be more vigilant.
Although the government has put a positive spin on the fines by claiming that they prove no one is above the law in Chile, investors and the business community are not so easily convinced. In truth, if the stock-exchange regulator is right, Mr Ponce and his friends were above the law for years. And nobody, not the government, not the minority shareholders, and least of all the regulator itself, seemed to notice.
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