Shareholder LawsuitYesterday I wrote about what may well be the next great bribery and corruption scandal across the globe involving the Venezuelan state oil company Petroleos de Venezuela SA (PDVSA). However, the current largest corruption scandal, involving the Brazilian energy behemoth Petrobras, is still alive and kicking. Just as PDVSA may involve corruption at the highest reaches of the company, it may well turn out to have been the same at Petrobras, with executives and even directors using the company as a cash withdrawal machine for their personal benefit.

The investor class has taken it on the chin in recent shareholder actions for companies embroiled in claims based upon the Foreign Corrupt Practices Act (FCPA). Recently shareholders from both Wynn Resorts and Wal-Mart had their appeals from the trial courts’ dismissal of their underlying lawsuits denied by two separate Courts of Appeal. Generally speaking, it is difficult to reach a Board of Directors because rarely does evidence of bribery and corruption reach the Board level. Indeed, as the Wal-Mart plaintiffs found out, it is usually most difficult to even make sufficient allegations, which will pass procedural muster.

However, there is one upcoming shareholder case that may change these dynamics. It is the shareholder action in the federal court for the Southern District of New York against Petrobras and is being heard by Judge Jed Rakoff. Trial is set for the case on September 19, 2016 and is expected to last for up to eight weeks. According to an article in by Kenneth Rapoza, entitled “Brazil’s Petrobras Trial Date Set, As U.S. Pension Funds Seek ‘Tens of Billions’ In Losses”, the plaintiffs claim “that Petrobras also violated its own Code of Ethics, as its employees and executives were routinely accepting bribes from certain construction companies.” The Complaint goes on to allege that “Petrobras’ own internal controls over financial reporting were ineffective, according to Pomerantz’s [lead plaintiffs’ counsel] claim, and as a result Petrobras’ public statements were materially false and misleading “at all relevant times.””

Things are so bad for Petrobras that the plaintiffs have filed a Motion of Partial Summary Judgment (MSJ) on liability before Judge Rakoff, alleging that there is no dispute the company was involved in bribery and corruption. Joe Leahy, writing in a Financial Times (FT) article entitled “Scandal-hit Petrobras reels as corruption claims persist”, quoted the plaintiffs’ counsel Jeremy Lieberman that “The only issue to go to trial would be the level of damages.” In its MSJ, the plaintiffs’ said, “Petrobras raised tens of billions of dollars from investors during the class period under the pretence that it would be used to improve the company, but instead knowingly doled out the money to insiders and politicians.”

Typically the problem is that, as in the Wynn Resorts matter, there is no evidence that the Board was involved in bribery or corruption or as in the Wal-Mart case, the plaintiffs are denied discovery that would even allow them to make the requisite allegations of illegal actions. However, in the Petrobras case, Brazilian prosecutors have done most of the spadework needed to get the plaintiffs’ past the defense procedural motions to dismiss and at trail before a judge and jury.

Leahy reported that Brazilian prosecutors have alleged that corrupt former Petrobras Directors were recipients of bribes and directed monies away from the company for illegal purposes. He wrote, “Prosecutors claim Paulo Ferreira, a former treasurer of Brazil’s erstwhile ruling Workers’ party, took money originally destined for a research and development centre for Petrobras’s ultra-deepwater oilfields and used it to pay a samba queen a monthly stipend.” Spelling it out in greater detail, in a Brazilian filing outlining Ferreira’s arrest, “At the request of Paulo Ferreira, there were made diverse payments to the non-governmental organisation Sociedade Recreativa e Beneficente Estado Maior da Restinga, a samba school, and people linked to it, such as Viviane Rodrigues da Silva, the battery queen”.

These allegations by Brazilian prosecutors lend weight to the plaintiffs’ claims that “Petrobras raised tens of billions of dollars from investors during the class period under the pretence that it would be used to improve the company, but instead knowingly doled out the money to insiders and politicians.” If these actions were engaged in at the corporate Director or Board level, it could certainly portend a different result than in Wal-Mart or the Wynn Resorts matters.

Reuters had previously reported that, in a huge victory for the plaintiffs, Judge Rakoff had granted class action status for the litigation. In an article entitled “Brazil’s Petrobras must face U.S. group lawsuits over corruption: judge”, Jonathan Stempel and Nate Raymond reported that the Judge certified two classes of plaintiffs, saying their claims are similar enough to be pursued as groups. One class bought various Petrobras securities from January 2010 to July 2015 and will be led by Universities Superannuation Scheme of Liverpool, England. The other bought debt securities from offerings in 2013 and 2014, and will be led by North Carolina’s treasurer and the Employees’ Retirement System of Hawaii. In his written decision, Judge Rakoff said, “Petrobras was a massive company with investors around the globe. Notwithstanding Petrobras’s size and its numerous and far-flung investors, the interests of the class members are aligned and the same alleged misconduct underlies their claims.”

Obviously the most straight-forward difference between the Petrobras matter and the Wynn Resorts and Wal-Mart cases is that the latter two were not alleged to have taken bribes but were sued for their failure to stop alleged bribery and corruption. At Petrobras, there is no disputing that senior executives received bribe payments to award contracts. Petrobras has tried to claim that it is a victim in the entire corruption scandal. The FT piece cited to Petrobras Chief Executive Pedro Parente, who said “last month the company was a victim of fraud, estimated to have cost it about $2.5bn in losses directly related to corruption.” However if the corruption reaches above the senior executive level and up to the Director level, it may be the company was a fraud closer akin to Enron and WorldCom.

Leahy ended his piece with the following, “In the meantime, with the Petrobras investigations continuing, investors will be left wondering what new surprises they might uncover about what past directors were doing with the company’s money.” Indeed.


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© Thomas R. Fox, 2016