The Petrobras Scandal Comes to New York
A massive lawsuit has been filed by bondholders in New York federal court against Brazil’s state oil company, Petrobras. The lawsuit, which draws support from an ongoing corruption investigation in Brazil, alleges that Petrobras executives engaged in a deliberate scheme of money-laundering and bribery that cost the company’s investors hundreds of millions of dollars. The allegations have rocked the company, costing the CEO Maria das Graças Foster her job and sending other executives to jail. The company, worth over $300 billion at its peak in 2008, is now worth only $48 billion. The plaintiffs are investors who acquired the securities of Petrobras on the New York Stock Exchange or pursuant to private domestic transactions between May 20, 2010 and Nov. 21, 2014. The plaintiffs estimate Petrobras sold more than $98 billion in NYSE-registered securities during the class period, comprising debt securities issued in three note offerings, and American depositary shares (“ADSs”) representing common and preferred stock. They claim that Petrobras’ corruption artificially inflated the value of these securities, culminating in a massive decline in value when the scandal became public.
The plaintiffs are comprised of three classes:
1. Purchasers of Petrobras securities on the NYSE or pursuant to other domestic transactions. This claim is made under the Securities & Exchange Act of 1933 (the “Exchange Act”).
2. Purchasers of debt securities issued by Petrobras International Finance Company S.A. (“PifCo”) and Petrobras Global Finance B.V. (“PGF”) traceable to any of three public offerings registered in the United States:
– A February 2012 offering by PifCo which sold approximately $7 billion in notes
– A May 2013 offering by PGF which sold approximately $11 billion in notes
– A March 2014 offering by PGF which sold approximately $8.5 billion in notes.
This claim is made under the Securities Act of 1933, and is also made against the banks who underwrote the securities.
3. Purchasers of Petrobras securities on the Brazilian stock exchange during the period between January 22, 2010 and March 19, 2015 who also acquired Petrobras securities traded on the NYSE or pursuant to other U.S. transactions during the same period. Interestingly, this class pursues claims for violations of Brazilian law – not the law of the U.S.
The lawsuit will proceed as a class action, a legal form which allows a single claimant to act as representative of a large group of affected claimants – many of which are unidentified at first – in pursuing legal claims against defendants. The defendants in this class action, which was originally filed in December 2014, include not only Petrobras, but also its auditors (chiefly PWC), specific individuals at Petrobras, and the banks that acted as underwriters in the company’s bond issues. The bondholders claim that the defendants misrepresented the risks of investing in the company; that Petrobras presented its securities as safe investments while engaging in dangerously illegal behavior that put the company at risk. The fifteen banks named were underwriters for Petrobras’s bond issues. The allegations against them are factually sparse: plaintiffs claim not that the underwriters took part in Petrobras’ bribery, but that they should have uncovered it.
The U.S. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have launched their own investigations into Petrobras. This may lead to a range of penalties for Petrobras, for corporations doing business with Petrobras, and for specific individuals implicated in wrongdoing. These penalties could include fines or criminal sanctions, such as imprisonment. These government investigations will also complicate the civil lawsuit. They may turn up further evidence of wrongdoing, strengthening the investors’ claims. And the investigations will further depress Petrobras’ stock price, adding to the claims for damages.
There is an unusual element to the SEC and DOJ investigations. The agencies will probably examine Petrobras’ conduct in light of the Foreign Corrupt Practices Act (FCPA), which bans bribing foreign officials to obtain or retain business. The FCPA applies to companies listed on U.S. securities exchanges (like Petrobras). However, the FCPA is typically used to prevent U.S. companies or multinationals setting up overseas operations and bribing local officials. The Petrobras case is an interesting inversion of this situation, as it concerns a Brazilian company’s acts in Brazil. This poses an interesting legal question: if a Brazilian employee of a Brazilian company bribes a Brazilian government official, is that bribery of a ‘foreign official’? After all, the players are all from the same country. If so, the FCPA grants the U.S. government broad power to police bribery that would normally fall within the jurisdiction of the foreign state.
This case will grow and grow, affecting an expanding pool of individuals. The Brazilian investigation will probably turn up further evidence and defendants. And the extensive discovery available in the U.S. means that evidence that was not revealed in Brazil is likely to be revealed now. As the lawsuit and investigations progress, a number of subpoenas will be served, asking a range of individuals and companies to provide documents and testify. Considering the complexity of these issues, this may be both burdensome and hazardous for those served. Even if they are not currently named as defendants, subpoena respondents should retain independent counsel and exercise caution, as their testimony could open them to liability both in the class action and in the investigations by the SEC and DOJ.