The country's privately owned deposit insurance fund, known as FGC, will manage Sao Paulo-based Cruzeiro do Sul for 180 days, the central bank said in a statement today. Signs of apparent fraud were found in a 1.3 billion-real ($633 million) portfolio owed by the bank, which is being prepared for sale, said the head of FGC, Antonio Carlos Bueno.

Cruzeiro do Sul, Brazil's 27th-largest lender by assets, "violated financial-system rules" and regulators found "unsubstantiated asset items," according to the statement.

The bank had been searching for a buyer before today's announcement, and held talks with Sao Paulo-based Grupo BTG Pactual SA, Bueno said at a press conference. A transaction fell through because the credit portfolio lacked proper documentation, he said, adding that the company has enough liquidity to meet all its obligations, which include 2.8 billion reais in foreign debt.

Cruzeiro do Sul is struggling with tighter funding opportunities, rising competition and slowing loan growth, Moody's Investors Service said in March when it lowered the bank's debt rating to B2, five levels below investment grade.

Cruzeiro do Sul said in an e-mailed statement that it couldn't comment. Paycheck loans, known as consignado in Brazil, represented 96.4 percent of its loan portfolio of 7.58 billion reais at the end of the first quarter.

Banco Nacional

The central bank said it was the first time regulators had used the temporary intervention program known as Raet since 1995, when they took control of Banco Nacional SA. Bueno said FGC didn't inject any money into Cruzeiro do Sul.

FGC bailed out Banco Panamericano in November 2010 with 3.8 billion reais amid a fraud investigation by the central bank. BTG Pactual bought about 50 percent of Panamericano from Silvio Santos, the bank's former controlling shareholder, in January 2011. Panamericano said a month later that losses related to "accounting distortions" had reached 4.3 billion reais.

The intervention announced today "means the central bank will seek to find a possible buyer for Cruzeiro do Sul while FGC manages the bank," Ricardo Rocha, a professor of finance at Insper business school in Sao Paulo, said in a telephone interview. "The central bank is trying to avoid liquidating the bank."

Shares Suspended

Cruzeiro do Sul fell 45 percent this year through yesterday in Sao Paulo trading, compared with a decline of 5.6 percent for the benchmark Bovespa stock index. BM&FBovespa SA, which operates the Sao Paulo stock exchange, suspended trading on the bank's shares, and Bueno said they won't trade again until the end of an audit that may take 60 to 90 days to complete.

Cruzeiro do Sul ended the first quarter with 12 billion reais in assets, up from 11.5 billion reais in December and 9.68 billion reais a year earlier, data from the central bank show. Its assets represent 0.22 percent of Brazil's total.

The central bank's intervention, which will seek to "correct operational procedures," also applies to other units of Cruzeiro do Sul, including the securitization firm Cruzeiro do Sul SA Cia. Securitizadora de Creditos Financeiros and brokerage Cruzeiro do Sul DTVM.

The company said in March that it planned to pay off $175 million in dollar bonds maturing in September by selling asset- backed securities to FGC.

--With assistance from Blake Schmidt in Sao Paulo. Editor: Steve Dickson