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Pension Funds

A rocker puts down his bass to fight corruption at $22 billion Brazilian pension fund

Petros CEO Walter Mendes

At the helm of an 80 billion reais ($21.6 billion) Brazil pension fund, Walter Mendes battled multibillion-dollar deficits, sued the fund's former chiefs and set aside one of his passions — playing bass in a rock band.

And he's ready for more.

The CEO at Petros, the pension system for state-run oil giant Petrobras, is preparing additional court battles to try to get back at least some of the money the fund lost in recent years through dubious investments now being targeted by corruption probes.

"We just filed our first reimbursement lawsuit," Mr. Mendes said in an interview at Bloomberg's offices in Sao Paulo. "It certainly won't be the last."

Petros is asking for 584 million reais in restitution from 10 former directors and board members, including two CEOs, for losses in the acquisition of a stake in Itausa - Investimentos Itau from builder Camargo Correa at allegedly unfair prices in 2010.

Mr. Mendes' struggles with the fund's past were clear from the start. On his third day on the job in 2016, police launched an investigation into alleged corruption at the country's biggest pension funds, including Petros. He negotiated with prosecutors to fully cooperate in exchange for a deal that avoided searches of the fund's offices or employees' homes, a scene that's become commonplace in Brazil.

The 62-year-old executive has launched an internal investigation at Petros, proposed changes to the fund's bylaws and hired four of Brazil's biggest legal firms to evaluate which lawsuits are worth pursuing. And he's in a hurry: Some of the 80,000 workers who contribute to the pension system are paying extra to help cover the deficit in the main fund over the past two years — almost 31 billion reais — and some are suing Petros because of that.

The fund has no shortage of poor investment decisions. One of its biggest flops was a stake in Sete Brasil Participacoes, a company set up to build an offshore drilling fleet that went bust amid a massive graft scandal at Petrobras. Petros also invested in Cia Brasileira de Tecnologia Digital, a tech company that battled Apple Inc. for the trademark rights to sell iPhones in Brazil — and lost. Mr. Mendes declined to give details on what other lawsuits the fund is considering.

As part of his reforms, Mr. Mendes reorganized the fund's investment group, which he said had been making irrational decisions, and set up internal controls to block political appointments. The CEO also stepped up the pace of divestments, raising about 6.4 billion reais from selling stakes in companies including Itausa and utility CPFL Energia, as well as some real estate assets. Most of the cash went to buy government bonds known as NTN-B, which pay a fixed interest rate plus inflation, as a market rout in Brazil made yields more attractive, Daniel Lima, Petros' head of investing, said in the same interview.

"We increased our cash, gained flexibility, so we don't need to sell any more assets," Mr. Lima said. While the fund is in no rush to complete the long-awaited sale of its stake in iron-ore producer Vale, it could happen by year-end, according to Mr. Lima.

Petros has no intention of buying big corporate stakes to get a seat on the board because that restricts the funds' ability to buy and sell, Mr. Lima said. But he said Petros will continue to be an activist, like when it worked with other pension funds to push out the entire board at food giant BRF SA, which had been posting poor results.

Mr. Mendes is also focused on modernizing and automating processes for doling out benefits, he said.

Overhauling the fund came at a personal cost for Mr. Mendes. Moving from Sao Paulo to Rio de Janeiro, where Petros is based, forced him to quit playing bass at Black Zornitak, a rock band with finance-inspired songs such as "Too Big to Fail" and "Manager's Advice." Bandmates include other well-known names from Brazil's financial world, including Marcelo Giufrida, the CEO of Garde Asset Management.

"Our biggest challenge is how to create structures to avoid new wrongdoing after we leave," Mr. Mendes said of his goals for the pension fund. "Who knows — maybe one day after I meet this Petros challenge I can go back to show business."