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 The case, filed in Manhattan federal court in December by a group of
large investors, alleges $98 billion of the company's American
depository shares, or ADRs, and bonds were artificially inflated
since 2010 by the company overstating the value of assets such as
major projects. Petrobras has moved to have the case dismissed.
The plaintiffs say Petrobras improperly inflated the project costs
to fatten profits of suppliers and contractors, who in turn kicked
cash back to Petrobras employees.
Last week, the company wrote down assets to reflect a more accurate
value, and the lawyer leading the class actions for investors said
the restatement is "highly relevant" to the case and bolsters his
clients' allegations.
"We believe these facts are certainly helpful to our case," said
Jeremy Lieberman, an attorney with the Pomerantz law firm in New
York, who is leading the plaintiffs' case.
Petrobas has argued that investors are taking aim at the wrong
parties. It wants the case dismissed before investors can begin the
process of demanding evidence from the company, such as documents
and witnesses which might prove their case.
"Petrobras itself was the victim in this scandal, carried out by a
criminal cartel of Brazil's largest construction and engineering
companies," said the defendants in papers filed in U.S. District
Court in Manhattan.
Petrobras blames a group of Petrobras suppliers, corrupt politicians
and former Petrobras employees, and none of them have been named as
defendants.
The investors are due to file papers opposing Petrobras' motion to
dismiss on May 8.
More than a dozen large investors sued Petrobras beginning last
year, including the City of Providence, Rhode Island, and public
pension systems in Ohio and other states. Those cases were
consolidated in March and British pension fund Universities
Superannuation Scheme Ltd, which said in a court filing it had lost
about $84 million on its Petrobras holdings, was appointed lead
plaintiff. It will represent the proposed class and negotiate any
eventual settlement.
The $98 billion of stocks and bonds that the plaintiffs allege was
artificially inflated is more than half again the company's $59.6
billion stock market capitalization today. Petrobras' $70 billion
secondary share sale in 2010 was the largest sale of stock in
history.
Petrobras has fallen a long way from seven years ago, when it grew
to the world's fifth-largest company and became a way to bet on
Brazil's bustling economy and recently discovered deep-sea oil
reserves. Today, the economy has stalled, oil output is flat and
Petrobras is the world's most indebted energy company.
BRAZILIANS IN THE STREETS
The scandal has brought millions of Brazilians to the streets to
demand the resignation of President Dilma Rousseff, who was
chairwoman from 2003 to 2010 of Petrobras, when most of the
corruption took place, according to Brazilian courts. The Brazilian
government owns a majority of Petrobras' voting stock, giving it
seven of 10 seats on the Petrobras board and control of the company.
Rousseff has not been implicated in the scandal, and the lack of
evidence tying her or Petrobras' former chief executives to the
scandal may undermine investors' legal claims, said Todd Henderson,
a professor at the University of Chicago Law School.
That's because the investors will lack proof that top Petrobras
executives knowingly committed material wrongdoing, rather than
merely mismanaging the company, said Henderson, a key requirement of
some U.S. securities law claims.
"I think it's a very hard case," said Henderson.
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However, investors also allege that Petrobras, the bankers that sold
its securities, several executives and the company's accountants
allowed investors to rely on materially misleading statements when
purchasing ADRs and bonds.
These claims point to information in the carefully worded offering
documents that accompany the sale of Petrobras securities.
Importantly, these types of allegations don’t require proof that the
defendants knowingly made the misstatements, which increases the
likelihood the investors may prevail.
Another legal expert, James Park, a professor at the University of
California Los Angeles School of Law, said Wednesday's write-downs
bolster the class-action case, particularly for bondholders.
"They have lent money against the assets and they have fewer assets
now, so the creditworthiness of the company is certainly in
question," said Park. "I would be very surprised if the case is
dismissed."
If the case survives early dismissal, the two sides would begin
fighting over the discovery process of demanding access to potential
evidence and witnesses who could help investors to prove their case.
In general, securities cases settle after a court determines the
scope of the class represented by the lawsuit. The process often
takes many years after the initial complaint is filed, and Park said
the plaintiffs would have little incentive to settle quickly given
the recent revelations.
Securities cases have produced some of the largest class action
settlements.
Energy company Enron Corp and telecommunications company WorldCom
Inc crashed into bankruptcy early in the new millennium. Securities
class action lawsuits eventually led to a series of settlements that
produced $7.1 billion for Enron investors and $6.2 billion for
WorldCom backers, two of the largest ever.
The hearing on early dismissal is scheduled for May 29, in front of
U.S. District Judge Jed Rakoff, who is known for his tough stance on
corporate wrongdoing. He has refused to approve settlements
presented to him by U.S. regulators who allowed defendants to avoid
admitting any wrongdoing.
Petrobras increased its legal provisions to 4.091 billion reais
($2.4 billion) in the fourth quarter of 2014, when the U.S. class
action was filed, up 40 percent from a year earlier. That was an
increase of only 2.8 percent from the third quarter of 2014. The
company did not comment on the U.S. lawsuit in Wednesday’s statement
on its write-down.
The case is In re: Petrobras Securities Litigation, U.S. District
Court, Southern District of New York, no. 14-cv-9662
(Writing by Tom Hals in Wilmington, Delaware, additional reporting
by Jeb Blount in Rio de Janeiro and Ayesha Rascoe in Washington,
editing by John Pickering)
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