By Brad Brooks and Ricardo Brito

SAO PAULO/BRASILIA (Reuters) - The chief economic advisor to Jair Bolsonaro, Brazil's far-right presidential front-runner, is under a federal investigation for alleged fraud tied to the pension funds of major state-run companies, prosecutors told Reuters on Wednesday.

The investigation of Paulo Guedes, a University of Chicago-trained economist credited with nudging Bolsonaro toward market-friendly policies and tapped as his future finance minister, was first made public by the Folha de S.Paulo newspaper.

An investigator with direct knowledge of the case as well as the federal prosecutor's press office confirmed the inquiry. It alleges Guedes mismanaged 1 billion reais (202.6 million pounds) that public pension funds put in his investment vehicles starting in 2009.

Bolsonaro almost won an outright majority in Sunday's presidential election and is expected to beat leftist rival Fernando Haddad in the Oct. 28 run-off vote.

Although Bolsonaro has praised Brazil's 1964-85 military dictatorship and consistently voted to give government more control over the economy during three decades in Congress, Guedes has convinced investors that the 63-year-old former Army captain had reversed his thinking on economic policy.

Brazil's benchmark Bovespa stock index and the country's currency, the real, have rallied as Bolsonaro's candidacy gained strength. The Bovespa was down 1.8 percent and the real slipped 1 percent against the U.S. dollar on Wednesday.

Prosecutors are probing a decision to invest in a company in which Guedes was the controlling shareholder, along with tens of millions of reais in payments made as speaking fees to unknown parties using some of this money, the source said, confirming the details of the Folha report.

Bolsonaro, who met Guedes for the first time last year, is not accused of any wrongdoing. The newspaper, citing court documents, said Guedes allegedly worked with executives at the pension funds with strong ties to the leftist Workers Party, whose candidate in the run-off is Haddad.

The investigation of Guedes marks the first time that a member of Bolsonaro's inner circle of advisers has been the subject of a major corruption investigation.

In the past four years, Brazilian investigators have discovered what some have called the world's largest political corruption schemes ever found, put in place under the Workers Party's governments from 2003 to 2016 and involving several mainstream political parties.

The extent of the graft schemes has fueled Brazilian voters' outrage at traditional parties, helping to propel the anti-establishment Bolsonaro to the top of the presidential field.


The document seen by Folha said the alleged fraud currently being probed took place at seven public pension funds, including those for employees from state-controlled oil company Petroleo Brasileiro SA, Banco do Brasil, state bank Caixa Economica Federal [CEF.UL] and the postal service.

A representative for Bolsonaro, whose campaign is founded on an anti-corruption and anti-crime message, did not respond to a request for comment. It was not immediately possible to reach Guedes.

The newspaper said the investigation was opened on Oct. 2, five days before Brazil's first-round presidential vote in which Bolsonaro took 46 percent of the ballots to Haddad's 29 percent.

According to the Folha report, investment firms controlled by Guedes launched two funds in 2009 that received 1 billion reais ($269 million) from the public entities over six years.

That year, 62 million reais were injected into a company known as HSM Educacional, which Guedes allegedly controlled. The firm allegedly acquired 100 percent of a separate private company, HSM do Brasil, the paper said.

The latter firm allegedly operated as a front rather than a legitimate business, according to the investigators' document seen by Folha.

Investigators are looking at millions of reais that HSM do Brasil paid out to speakers at various investment events in Brazil as well as millions spent on personnel.

(Reporting by Brad Brooks and Ricardo Brito; Additional reporting by Gram Slattery; Writing by Brad Brooks; Editing by Dan Flynn, Jeffrey Benkoe and Paul Simao)

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