Bonds on the run: millions in U.S. dollar notes issued by a closed state bank haunt Venezuela's government.

A tale of dubious bonds, an Italian accused of fraud and contradictory government decisions has the Venezuelan government defending itself in an Ohio courtroom, where bondholders say the country's international credibility is at stake.

The story starts in Caracas in 1981, with the now-defunct Banco de Desarrollo Agropecuario, known as Bandagro. The government-run bank may or may not have issued more than a billion U.S. dollars in bearer bonds before being liquidated. The Venezuelan government later assumed the bank's liabilities. Since then, supposed Bandagro bonds have surfaced periodically on international markets--often only to be dismissed as counterfeits.

In 2002, Gruppo Triad, in Panama, demanded that the Venezuelan government redeem U85600 million worth of Bandagros it held. Gruppo Triad's case wasn't helped by a Venezuelan national assembly investigation of Triad's general manager, an Italian named James Paolo Pavanelli. Adriana Bermudez, a junior economist with the assembly's economic and financial advisory office--she has since left the institution--claimed, based on Panamanian newspaper reports from October 2001, that Panama arrested and deported an Italian by that name wanted by British and Italian authorities on fraud and false bankruptcy charges.

Triad itself boasts on its Web site that the company was "at one time a giant in several different industries," including hotels, banking, airlines and movie production. But there is little evidence of such a company besides its own, amateurish website. Meanwhile, two previous Venezuelan ministers have declared all Bandagro notes fakes. Even the Bandagro official who supposedly signed Triad's notes says his signature was falsified.

But there's no keeping a good story of lost millions down. In October 2003, Venezuelan Attorney General Marisol Plaza issued a ruling saying that the bonds should be paid. Relying on that decision, a group of Ohio bondholders known as Skye Ventures is suing Venezuela, having purchased paper with $100 million in face value from Gruppo Triad.

Skye says its bonds are not the same ones that were previously declared fakes, and it offers expert testimony to the papers' authenticity. Yet their case rests primarily on Plaza's 2003 decision, which investors call definitive. "We analyzed the law. We found that the attorney general's written decree was a binding decision in Venezuela ... and that was why we bought the notes," says Columbus, Ohio attorney and accountant David Richards, who heads the Skye investor group. Skye attorney Luis Alcalde adds, "All further allegations are really irrelevant."

Analysts in Venezuela say the reasoning in the attorney general's October 2003 opinion is weak. In another twist, in April 2005 Plaza claimed that she had issued a second ruling, two months later, reversing the October decision.

Plaza was misinformed when making the first ruling, says Florida attorney Marc Nurik, part of the Venezuelan government's U.S. legal team. "When she finally got all the facts, she revoked the opinion," he says. Sounds solid enough, but for a year and a half Plaza never publicly mentioned the reported second decision, neither in court filings nor in a newspaper interview about the bonds.

Despite Venezuelan President Hugo Chavez's harsh criticisms of the international financial system, Venezuela pays its foreign debts punctually. Skye claims that, with interest and penalties, its bonds are now worth $600 million. There is a second, similar lawsuit in Swiss courts. If Venezuela honors the Skye bonds, it could start a flood of claims from other supposed bondholders, potentially costing the country billions.

Disclosure. Yet the biggest impact could be psychological. A ruling in favor of Skye would add to claims that Venezuela plays fast and loose with the rules of international business. The story so far is rife with evidence of disrespect for full disclosure, a key ingredient in international capitalism: Gruppo Triad approached Venezuelan authorities with the bonds in March 2003, yet news of their existence appeared only after a Caracas newspaper reporter received a fax from an employee at a U.S. bank that had been approached by Triad to buy the bonds.

What's more, according to investigators, while the ministry's decision was still secret, bond traders began expressing via e-mail a sudden interest in purchasing Bandagros. Soon after the national assembly's investigative office issued its negative report, its director was fired. Some involved suggest that Bandagro officials might have issued the bonds on a personal initiative, without obtaining required ministry approvals. Denials all around, and the case continues.