This blog post will begin a multi-part exploration of the Petróleo Brasileiro S.A. – Petrobras (Petrobras) Foreign Corrupt Practices Act (FCPA) enforcement action. The action was a stunning reminder of the costs of endemic corruption. However, I first have to pay tribute to one of the great vocalists of rock and roll; Jefferson Airplane co-founder Marty Balin, who died over the weekend. Balin joins co-founder Paul Kantner and original vocalist Signe Toly Anderson who both died the same week in January 2016 in the great rock and roll music hall in the great forever. Anderson left the band after their first album, she was replaced by Grace Slick and the classic Airplane line up was formed.

The band had a great run from 1966 to 1971. Balin was a smoothly soulful tenor who sang counter-point to Slick’s contra-alto. You only need to check out the YouTube clip of his signature classic Airplane song Volunteers at Woodstock to see how he and Slick played off each other. He also wrote the ballad Miracles for the group’s return as Jefferson Starship in 1975. If you were in high school or college in 1975, you not only remember this haunting love song but who you were with at the time. So here’s to you Marty, I hope you Kantner and Anderson have joined up again and are cranking out the tunes in that great rock and roll hall in the sky.

The Petrobras FCPA enforcement action came in the form of a Non-Prosecution Agreement (NPA) with the Department of Justice (DOJ) and Cease and Desist Order (Order) with the Securities and Exchange Commission (SEC). The penalties were stunning. The FCPA Blogreported the settlement “included a criminal penalty of $853.2 million. Under the NPA, Petrobras will pay 10 percent or $85.3 million of the criminal penalty to the DOJ and another 10 percent to the SEC. Petrobras will pay the remaining 80 percent or $682.5 million to the Ministerio Publico Federal in Brazil.” The DOJ fine represents a 25% discount off the low end of the range of the US Sentencing Guidelines. (We will explore how this was achieved in a subsequent blog post.) In addition to the eye-popping monetary fine and penalty, there was no independent monitor required by the DOJ or SEC.

In a DOJ Press Release, “Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division, U.S. Attorney G. Zachary Terwilliger of the Eastern District of Virginia and Assistant Director Robert Johnson of the FBI’s Criminal Investigative Division made the announcement. “Executives at the highest levels of Petrobras—including members of its Executive Board and Board of Directors—facilitated the payment of hundreds of millions of dollars in bribes to Brazilian politicians and political parties and then cooked the books to conceal the bribe payments from investors and regulators,” said Assistant Attorney General Benczkowski.  “The Criminal Division’s Fraud Section—together with our partners in the Eastern District of Virginia, the SEC, and the FBI—are grateful for the assistance provided by our Brazilian law enforcement counterparts.  This case is just the most recent example of our ability to work with our foreign counterparts to investigate companies and other criminal actors whose conduct spans multiple international jurisdictions.”

In the SEC Press Release, Steven Peikin, Co-Director of the SEC Enforcement Division, said, “Petrobras fraudulently raised billions of dollars from U.S. investors while its senior executives operated a massive, undisclosed bribery and corruption scheme,” said. “If an international company sells securities in the United States, it must provide truthful information about its business operations.” This included “Petrobras’s false and misleading filings included materially false and misleading statements to U.S. investors in a $10 billion stock offering completed in 2010. The filings misrepresented Petrobras’s assets, infrastructure projects, the integrity of its management, and the nature of its relationships with its majority shareholder, the Brazilian government.”

These fines and penalties are on top of Petrobras’s settlement of a class action securities action in the US in January of this year for $2.95 billion for which it received credit in the SEC settlement. The D&O Diary noted at the time, the Petrobras settlement is “the fifth largest U.S. securities class action settlement ever, exceeded only by Enron ($7.2 billion), WorldCom ($6.1 billion), Tyco International ($3.2 billion), and Cendant ($3.2 billion). The Petrobras settlement is also the largest settlement in that order of magnitude for many years; the other large settlements ahead of Petrobras on the top ten list were all settled several years ago. The only recent settlement anywhere remotely close to the Petrobras settlement in sheer size is the Household International case, which settled in June 2016 for $1.575 billion.” Finally, and according to the plaintiffs’ lawyers’ press release, “the Petrobras settlement is the largest settlement in a decade. It is also, according to the press release, the largest settlement of a securities class action lawsuit involving a non-U.S. company.”

The Petrobras FCPA settlement comes in at Number 3 of the Top 10 International Anti-Corruption Enforcement Penalties:

  1. JBF-Brazil-$3.6 bn-Brazil
  2. Odebrecht/Braskem-$2.6 bn-US, Switzerland and Brazil
  3. Petrobras-$1.78bn in US and Brazil
  4. Siemens-$1.6bn-Germany and US
  5. Telia Company -$965MM –US and Sweden
  6. Alstom-$814 in US and Switzerland
  7. Rolls-Royce-$809MM -UK, US and Brazil
  8. Veon (formerly Vimpelcom)-$795MM-US and The Netherlands
  9. Halliburton-$604MM-US and Nigeria
  10. Société Générale-$585 MM – US and France

According to the FCPA Blog, it now leads the all-time FCPA enforcement list:

  1. Petrobras-$1.78 bn in 2018
  2. Telia Company-$965MM in 2017
  3. Siemens-$800 MM in 2008
  4. Veon (formerly VimpelCom) – $795MM in 2016
  5. Alstom-$772 MM in 2014
  6. Société Générale-$585 MM in 2018
  7. Teva Halliburton-$579 MM in 2009
  8. Teva Pharmaceutical-$519MM in 2016
  9. Keppel Offshore & Marine Ltd.-$422 MM in 2017
  10. Och-Ziff-$412 MM in 2016

(Read Dick Cassin’s blog post for his calculus in bringing in the full fines and penalties to FCPA credit).

Whatever way you slice and dice it, the Petrobras corruption case was one of the most massive ever. It literally ran from the top of the organization all the way down and permeated the entire Brazilian economy and political scene. Tomorrow I will consider the bribery schemes used for this massive fraud. 

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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