SAO PAULO/BRASILIA - The chief economic adviser to Jair Bolsonaro, Brazil's far-right presidential front-runner, is being investigated over accusations of fraud tied to the pension funds of state-run companies, federal prosecutors told Reuters 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, is the first time that a member of Bolsonaro's inner circle has been the subject of a major corruption investigation.

The case has the potential to hurt support for Bolsonaro, who has campaigned on an anti-corruption and anti-crime platform to voters tired of waves of corruption allegations against business executives and politicians.

But in an interview with Reuters Wednesday, the president of Bolsonaro's party, Gustavo Bebbiano, said Guedes continued firmly in position as the candidate's economic guru despite the probe.

Lawyers for Guedes said the investigation was based on false allegations in the midst of the election "with the principal objective of confusing voters" in what they called "an affront to democracy."

Economist Paulo Guedes is seen before a lunch between businessmen and Jair Bolsonaro, a candidate for the Presidency of the Republic for the PSL, at the Federation of Industries of Rio de Janeiro (FIRJAN) headquarters in Rio de Janeiro, Aug. 6, 2018.

Wrongdoing denied

An investigator with direct knowledge of the case, who declined to be named, and the federal prosecutor's press office confirmed the probe to Reuters after it was reported by the Folha de S.Paulo newspaper. It alleges Guedes mismanaged 1 billion reais ($267 million) that public pension funds put in his investment vehicles starting in 2009.

Through his attorney, Guedes denied any wrongdoing and said the investments in question had yielded returns above contractually established targets, offering to provide all documentation needed to clear up the matter.

Previ, one of the public pension funds involved, said it had received above-target returns from its investment in a fund cited in the case, and a subsequent audit found nothing amiss.

Bolsonaro, who met Guedes for the first time last year, is not accused of any wrongdoing.

October runoff

Bolsonaro almost won an outright majority in Sunday's presidential election and opinion polls indicate he is on track to beat leftist rival Fernando Haddad in the Oct. 28 runoff 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 closed 2.8 percent down and the real lost around 1 percent against the U.S. dollar Wednesday, pressured by the Guedes probe as well as comments from Bolsonaro in an interview that dampened speculation about potential economic reforms.

Voter outrage

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 investigation

Prosecutors are probing a decision by funds managed by Guedes to invest in a company in which he 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 investigator said, confirming the details of the Folha report.

The newspaper, citing court documents, said Guedes allegedly worked with executives at the pension funds with strong ties to the Workers Party, whose candidate in the run-off is Haddad.

The document seen by Folha said the alleged fraud 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 and the postal service.

The newspaper said the investigation was opened 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 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.

In a statement to Reuters, press representatives for HSM said Guedes had never been a controlling partner at the company and he left its board in October 2014.

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, Folha reported, citing documents in the investigation.

HSM has been producing corporate events for the past 30years, with speakers including high-profile foreign CEOs and politicians, the company said in its statement.