SAO PAULO STATE BANK ACCUSED OF FAVORING ALCKMIN

UNCLAS SECTION 01 OF 02 SAO PAULO 000350

SIPDIS

SIPDIS

NSC FOR CRONIN
STATE PASS USTR FOR SULLIVAN/LEZNY
DEPT OF TREASURY OASIA, DAS LEE AND FPARODI
USDOC FOR 4332/ITA/MAC/WH/OLAC/SHUPKA
USDOC ALSO FOR 3134/USFCS/OIO/EOLSON/DDEVITO/DANDERSON
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONESE, NRIVERA, CMERVENNE
DOL FOR ILAB MMITTELHAUSER

E.O. 12958: N/A
TAGS: PGOV EFIN ECON PINR BR
SUBJECT: SAO PAULO STATE BANK ACCUSED OF FAVORING ALCKMIN
SUPPORTERS

REF: (A) 05 BRASILIA 2150 AND PREVIOUS

(B) 05 SAO PAULO 323

--------------
SUMMARY
--------------


1. Media reports published March 26 accuse state-owned "Nossa
Caixa" bank of directing advertising money to political allies of
Governor (and opposition presidential candidate) Geraldo Alckmin,
including several state legislators. Alckmin and senior bank
officials have denied wrongdoing; however, on March 27 an advisor to
Alckmin who was implicated resigned. In Brazil, where media
enterprises depend on government advertising revenue and public
relations firms live off government contracts, and where many
politicians themselves own radio and TV stations and newspapers,
official, political, and personal business too often gets mixed
together in less than salutary ways. To date, the allegations
against Nossa Caixa have not blossomed into a major scandal;
however, allies of President Lula and the Workers' Party (Partido
dos Trabalhadores - PT) may seize on it to try to tarnish Alckmin's
image. End Summary.

--------------
THE STORY
--------------


1. On Mach 26, leading-circulation daily "Folha de Sao Paulo"
published an expose alleging wrongdoing at "Nossa Caixa," a bank
owned by the State of Sao Paulo. According to the article, the bank
directed advertising funds to publications friendly to Governor
Geraldo Alckmin and publicity contracts to public relations firms
with close ties to his Brazilian Social Democracy Party (PSDB). An
internal audit of the bank revealed that between September 2003 and
July 2005, two public relations firms working without any contract
were paid 25 million reais (more than USD 12 million) in a variety
of irregular ways that are reportedly under investigation by a
public prosecutor. As a result of the audit, Nossa Caixa's
Marketing Manager, Jaime de Castro Junior, was fired in December
2005 for malfeasance, indolence, and indiscipline. Deeming himself
a scapegoat, Castro provided an account claiming that members of the
Governor's staff, in particular special advisor for communications
Roger Ferreira, pressured his department to direct business to
certain media and publicity entities. The newspaper article quotes
from e-mails purportedly exchanged among Ferreira, Castro, and
executives of public relations firmS under contract to Nossa Caixa,
discussing placement of ads.


3. Among those alleged to have benefited from the scheme are state
legislators Wagner Salustiano (PSDB),Afanasio Jazadji (PSDB),Vaz
de Lima (PSDB),Geraldo "Bispo Ge" Tenuta (PFL - Liberal Front
Party),and Edson Ferrarini (Brazilian Labor Party - PTB);
television stations Rede Vida and Rede Gospel; and the magazine
"Primeira Leitura," which was founded by Luiz Carlos Mendonca de
Barros, who served as Minister of Communications during the Fernando
Henrique Cardoso administration and has been identified as an
economic advisor to Alckmin's nascent campaign.

--------------
THE DENIALS
--------------


4. Ferreira and senior Nossa Caixa officials denied any political
influence in the bank's publicity and marketing operations, and many
of the alleged beneficiaries likewise denied any favoritism.
Primeira Leitura's website published a lengthy rebuttal. For his
part, Deputy Jazadzi opined that it was obvious that the Alckmin
administration was running the bank's publicity operations, noting

SAO PAULO 00000350 002 OF 002


that his own radio station had only received "sporadic" bank
advertising, which had dried up after in March 2005 after the
Governor's candidate, whom Jazadji had not voted for, lost his bid
to be elected President of the Legislative Assembly (ref B).


5. Governor Alckmin, who was expected to resign March 31 as required
by the Constitution in order to run for President, said there was no
truth to the allegations and that the case would not be
investigated. He indicated that Ferreira would continue to serve in
state government. However, Ferreira resigned the following day, all
the while insisting that he had done nothing "damaging to the rules
of ethics or the public spirit."


6. So far, only "Folha" and a few television news reporters have
pursued this story, and it is not clear whether it will gain
momentum. The PSDB succeeded in blocking a request by the PT to
create an investigative committee in the Legislative Assembly to
look into the matter, and also defeated efforts to call Ferreira,
Castro, Nossa Caixa President Carlos Eduardo Monteiro, and others to
testify before the Budget and Finance Committee.

--------------
COMMENT
--------------


7. It is difficult at this point to determine how much fire there is
beneath the smoke. There appears to have been some commingling of
personal, political, and official business, but to what extent, if
any, Ferreira or Nossa Caixa officials (beyond the hapless Castro)
did anything illegal or even unethical is not clear. Advertising
and publicity agencies, and the money they earn working in politics
and government, appear to be a rich source of scandal and
corruption, as illustrated by the important roles played by Marcos
Valerio Fernandes de Souza and Duda Mendonca in the scandals
involving the Lula government and the PT (see ref A). However,
given Governor Alckmin's reputation for probity, it might be awkward
for him to have to fall back on an "everybody does it" explanation.
He may not need to; he may well be able to weather this mini-storm
without damage. But the election is a long way off, and Lula and
the PT may try to build this episode into a larger attack on
Alckmin's ethics and administrative competence. End Comment.


8. This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN