UPDATE 5-JBS shares drop as Brazil police probe loans to meatpacker

(Adds BNDES comment in paragraph 8)

BRASILIA/RIO DE JANEIRO, May 12 (Reuters) - Brazilian police are investigating suspected fraud in loans to JBS SA, the world’s largest meatpacker, by state development bank BNDES, according to federal court documents released on Friday, adding to scandals circling the company.

The Brasilia-based court issued orders to bring in brothers Joesley and Wesley Batista, JBS chairman and chief executive, respectively, for questioning, according to the documents.

A JBS representative said Wesley had appeared before police and Joesley was out of the country. In a statement the company said all investments it received from BNDES followed laws and regulations governing capital markets.

Common shares of JBS fell nearly 3 percent in Sao Paulo. The court said the Batista brothers, who built their global meat empire out of a country butchery with the help of plentiful, state-subsidized credit, cannot make major changes to the company until police conclude the probe.

That may freeze plans for a $1 billion initial public offering of a food processing unit, JBS Foods International, which was already at risk of postponement because of lukewarm investor interest after other scandals.

The latest police probe, conducted in concert with federal audit court TCU, comes after investigations into how JBS obtained investments from pension funds tied to state-run firms and whether the company participated in bribery of health officials by Brazil’s powerhouse protein industry.

JBS has denied wrongdoing in those cases as well.

Maria Silvia Bastos Marques, head of BNDES, said in a conference call Friday that all the problems involving the bank will be duly investigated. She declined to elaborate.

Luciano Coutinho, who presided over BNDES at the time of the alleged irregular loans, is also implicated, the court said, confirming remarks from a police source earlier. Coutinho is believed to be currently outside Brazil, the police source said.

Without naming JBS, police said earlier that BNDES subsidiary BNDES Participações had from June 2007 onward disbursed loans to fund 8.1 billion reais ($2.6 billion) in acquisitions of other meatpacking companies.

Police said they would detain 37 people for questioning and execute 20 search warrants in the probe.

Investigators suspect fraud in those transactions, which were approved with intermediation of a consultancy owned by an unnamed lawmaker, the statement said.

According to the police source, former finance minister Antonio Palocci owned the consulting firm. Calls to a lawyer representing Palocci went unanswered. ($1 = 3.14 Brazilian reais) (Reporting by Lisandra Paraguassu in Brasilia and Pedro Fonseca in Rio de Janeiro; Additional reporting by Eduardo Simoes, Maria Pia Palermo and Aluísio Alves in Sao Paulo; writing by Bruno Federowski and Ana Mano; editing by Bernard Orr, Steve Orlofsky and David Gregorio)