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INFO WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 SANTIAGO 000867

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E.O. 12958: DECL: 2019/10/09
TAGS: PGOV ECON KCOR CI
SUBJECT: CHILE: Conservatives Beat Back Skeleton in Pinera's Closet

REF: SANTIAGO 755

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CLASSIFIED BY: Carol Urban, Deputy Chief of Mission, State
Department, US Embassy Santiago; REASON: 1.4(B)

¶1. (SBU) Summary: Eduardo Frei attempted to taint presidential
challenger Sebastian Pinera with renewed allegations of insider
trading. Pinera's skilled campaign team flipped the issue into a
referendum on the NGO that reported the incident. A competitive
businessman and politician prone to taking risks, Pinera has been
linked to a number of questionable actions in the past and is
likely to continue to face questions about past business deals, but
voters seem relatively unconcerned by these charges. End Summary.



Insider Trading Allegations Resurface...

--------------------------------------------- ------



¶2. (U) A highly motivated businessman willing to take risks,
Alianza presidential candidate Sebastian Pinera is no stranger to
scandal. The most recent accusations of impropriety surfaced
during a televised presidential debate on September 23, the first
major debate of this election cycle. Assigned to talk about
corruption, Concertacion candidate Eduardo Frei avoided speaking
about a series of fairly minor scandals that have tainted his
coalition's reputation and instead accused Pinera of insider
trading, citing an annual and worldwide Transparency International
report issued that day. The report noted that in July 2006, while
president of LAN Chile, Pinera purchased 3 million LAN Chile shares
just hours after receiving the company's latest and unpublished
financial report. Chile's Securities and Exchange Commission
investigated the transaction and charged Pinera with "abuse of
privileged information" in 2007. Pinera paid a USD 700,000 fine
and stepped down as president of the company, but denied any
wrongdoing. One claim is that the purchase had been programmed
before he obtained the company's financial report, and that his
mistake was not cancelling the purchase after he obtained the
information.



...but Attention Shifts to the Accuser

--------------------------------------------- ---



¶3. (U) In response to Frei's charge during the debate, Pinera
reiterated his denial of any illegal activity and demanded that
Frei apologize. Immediately following the debate, Pinera advisors
accused Chile Transparente, the local arm of Transparency
International, of political bias. In the following week, the topic
spurred a polemic debate--not about Pinera's actions, but rather
about the accuracy and objectivity of the report. One board member
of Chile Transparente, the local arm of Transparency International,
very publicly resigned from the organization amid the clamor.
Amidst the daily headlines questioning the objectivity and
management of the previously respected organization, Pinera's
alleged insider trading was all but forgotten.



Pinera on the Lam?: Alleged Financial Fraud in the 1970s

--------------------------------------------- ----------------------
--------



¶4. (C) Frei's debate offensive marks the second time that old
accusations of Pinera misconduct have resurfaced during the
presidential campaign. In July 2009, a Pinochet-era Justice
Minister stated that she had intervened on Pinera's behalf to
obtain an injunction that would prevent Pinera from being served
with an arrest warrant (reftel). This revelation related to
charges stemming from Pinera's tenure as general manager of the
Bank of Talca from 1979 - 1980, a period when there was little
oversight or regulation of Chile's banking industry and many banks
and bank executives enjoyed considerable success, often through
shady dealings. Like many other banks of the time--and not unlike
the recent financial crisis in the U.S.--the Bank of Talca made
many very risky loans, which initially led to handsome profits but
ultimately led to bankruptcy. However, Pinera and other Talca

SANTIAGO 00000867 002 OF 003


executives went beyond the typical improprieties of the day. In
addition to the bad loans they approved, they also created dozens
of fake companies, gave these companies loans from the bank, and
then used the funds to buy more bank shares. They profited again
when the government stepped in and bailed out the banking sector --
and its shareholders -- while the loans to fake companies were
written off and Pinera and other executives did not have to repay
the principal.



¶5. (U) In April 1982, a judge ordered Pinera's arrest. Pinera
went into hiding for 24 days in order to avoid being formally
served with the arrest warrant. His lawyers placed an injunction
on the case, which was heard by the Supreme Court. The injunction
was accepted and the case dismissed. The charges were never
investigated.



Links to a Price-Fixing Pharmacy

------------------------------------------



¶6. (U) More recently, Frei also attempted to highlight the
(relatively weak) link between Pinera and a 2008 price-fixing
scandal. In December 2008, Chile's National Economic Prosecutor's
Office sued three pharmacy chains for USD 15 million each, alleging
that they had colluded to raise the price of more than 200
medicines by as much as 200 percent in 2007 and 2008. In March
2009, one of the firms, Farmacias Ahumada agreed to pay a USD 1
million fine in exchange for having the charges dropped. The same
month, the press reported that Sebastian Pinera owned 2 per cent of
that retail chain via his investment fund, Santa Cecilia. Pinera
confirmed that he owned a small stake in the company, but claimed
he was unaware of these holdings, saying that he was "just like
millions of Chilean investors and individuals whose pension funds
hold stakes in the company." Pinera promptly sold his shares.



How About Frei?

---------------------



¶7. (C) Concertacion candidate Eduardo Frei's past has also come to
haunt him during this year's presidential campaign. In 1994,
then-President Frei pardoned Angel Vargas Parga, a drug trafficker
convicted of smuggling half a ton of cocaine into Chile. While
Frei claimed that he was motivated by Vargas' good behavior in
prison, opponents allege that Vargas' well-connected Christian
Democrat family was the real reason behind the release. (Note: A
longtime Frei confidante and advisor told us recently that
then-Justice Minister Soledad Alvear made the decision to pardon
Vargas. Frei was not involved in the decisionmaking and found out
after the fact, but has to defend the decision nonetheless. End
Note.) Alianza has also accused Frei of being improperly involved
in managing his investments during his presidential term.
Nonetheless, Frei--who is widely viewed as solid, respectable, and
frankly a bit boring--seems to have fewer skeletons in his closet
than his opponent.



Do the Voters Care?

--------------------------



¶8. (SBU) Chilean voters seem relatively unconcerned by the
allegations against Pinera. Polls suggest that voters see
corruption as a real problem in Chile, but don't rate tackling
corruption as a top priority. In an August poll by Ipsos, 53% of
those surveyed said that Chile was a corrupt country. However,
polls consistently show that voters' top concerns are unemployment,
crime, health, and education; corruption lingers near the bottom of
the list. Moreover, Pinera's image as an astute businessman seems
to be reflected in how voters see his strengths vis-a-vis Frei's.
Frei comes out slightly ahead of Pinera in measures of perceived

SANTIAGO 00000867 003.2 OF 003


honesty, while Pinera has a wide lead in terms of perceived
intelligence and ability to assemble a good political team.



The Forgotten Skeleton in Pinera's Closet: "Pineragate"

--------------------------------------------- ----------------------
-------



¶9. (U) Other potential minefields in Pinera's political and
business history remain and may surface during the presidential
campaign. The most significant of these stems from a 1992 phone
conversation in which Pinera discussed strategies to destroy
political rival Evelyn Matthei. The call--which featured Pinera
using coarse language and referring dismissively to Matthei as a
little girl--was secretly recorded by military intelligence and
passed to television-station owner Ricardo Claro, a business
magnate and Pinera rival. It aired on Chilean television in August
1992 when Claro made a surprise appearance on his station's public
affairs show. The ensuing scandal, referred to as "Pineragate,"
exposed Pinera's scheming; the fractious divisions within the
right; and continued military interference in politics. The
scandal torpedoed both Pinera and Matthei's hopes for the 1993
presidential election, and led to a rift between the two that has
only recently been repaired.



Comment

-------------



¶10. (C) Driven and competitive, Sebastian Pinera pushes both his
businesses and his politics to the limits of the law and ethics.
Some of his actions--such as lending money to fictitious
companies--seem to clearly cross the line into legal impropriety.
At other times, though, he seems more to be a victim of
circumstance, carelessness, or the sheer vastness of his fortune.
Disparaging your political opponent in a private telephone
conversation or investing in one troubled company amidst a diverse
portfolio hardly seems surprising for a hard-charging businessman
turned politician. These charges have aired at various times in
the past, and when they have resurfaced during this campaign have
had relatively little impact on the general public, which seems to
see them as a mix of old news and business as it used to be. What
is particularly noteworthy about the latest episode is the way the
tables have been completely turned to focus on the shortcomings of
the manner in which Chile Transparente managed the report, rather
than the underlying charges of insider trading. Such a reversal
can be attributed to three things: an impressive Pinera campaign
team eager to go on the attack, Frei's lackluster communication
strategists, and the generally conservative Santiago press. End
Comment.
SIMONS