Since March of 2014, when Brazilian authorities uncovered “Operation Carwash”, dozens of executives and companies have been investigated and found guilty in Brazil, including Brazilian companies with American Depositary Receipts (ADRs) traded in the New York Stock Exchange or Over-the-Counter (OTC) markets in the United States and foreign companies publicly traded in other jurisdictions.
Companies that are involved in Operation Carwash (and other operations related to corruption schemes in Brazil) listed in Stock Exchanges outside of Brazil, shall follow these jurisdictions’ laws and regulations. Hence, in case of violation, the companies are subject to criminal charges and indemnification suits by damaged investors.
Naturally, after corruption scandals are uncovered, the value of ADRs and other securities traded decreases dramatically causing severe losses to investors. Undoubtedly, losses originated by regular market oscillations are part of the risk previously accepted by investors and should not justify any claims – this principle prevails in most modern-market jurisdictions.
However, in many of the companies involved in Operation Carwash and other major investigations, as reported by specialized media, investigators and prosecutors identified many criminal practices (corruption crimes, money laundry schemes, financial statement fraud, false and misleading statements, overpriced contracts, breach of representation and warranties etc.). These violations, together with the conclusion that investors were misled on their investments, provide enough legal basis to ground strong indemnification claims against the companies involved and its transgressors.
In New York, for example, many lawsuits were filed against Petrobrás based on similar claims. As a result, U.S. district Judge Rakoff certified two classes of investors claiming that Petrobrás shares lost value and alleging violations of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5, as well as Section 11 of the Securities Act of 1933 (Petrobras Securities Litigation No. 14-CV-9662).
The so-called Class Action is a type of lawsuit present in the U.S. and other common-law legal systems by which one or several individuals or entities prosecute claims on behalf of members of a group to obtain monetary or other relief for the benefit of a “class”, even if the beneficiaries have no knowledge of their rights.
In Petrobrás’ case, judge Rakoff defined as being part of the Class Action: (i) all purchasers who, between January 22, 2010 and July 28, 2015, inclusive, purchased or otherwise acquired the securities of Petróleo Brasileiro S.A. – Petrobras, including debt securities issued by Petrobras International Finance Company S.A. and/or Petrobras Global Finance B.V. on the New York Stock Exchange or Pursuant to other domestic transactions; and (ii) all purchasers who purchased or otherwise acquired debt securities issued by Petrobras, PifCo, and/or PGF, in domestic transactions, directly in, pursuant and/or traceable to a May 13, 2013 public offering registered in the United States and/or a March 10, 2014 public offering registered in the United States before Petrobras made generally available to its security holders an earnings statement covering a period of at least twelve months beginning after the effective date of the offerings.
Moreover, Judge Rakoff’s ruled (July, 2015) that: as a matter of Brazilian Law investors that suffered losses in Bovespa (São Paulo Stock Exchange) must submit their claims to Arbitration, since the company’s ByLaws determine that any dispute must be resolved by Arbitration, and that such rule does not apply to investors that acquired securities in other jurisdictions (United States), in which case US courts are eligible to judge them.
By ruling that Bovespa investors are bound to the company’s arbitration rules, Judge Rakoff sets an important position indirectly, consolidating the possibility to file claims on behalf of damaged investors in the United States against companies involved in corruption in Brazil with securities traded in the American market.
After Petrobrás, many lawsuits were filed against Brasken, a Petrochemical company controlled by Odebrecht. The company’s situation tends to worsen as for the lawsuits filed in the United States, since Brasken entered into an agreement in December 2016 with the United States Department of Justice, and Brazilian and Suisse authorities pleading guilty for many charges.
Recently, Plea Deals of this nature were also signed in Brazil between Brazilian Authorities (Ministério Público Federal and Conselho Administrativo de Defesa Econômica) and the companies Odebrecht, Andrade Gutierrez, Camargo Correa, Setal, Carioca Engenharia and Rolls-Royce. In such agreements, the aforementioned companies reveal and commit themselves to reveal illegal facts, pay fines, as well as to implement compliance mechanisms to avoid repetition of a similar conduct.
Although benefits are granted to the companies after entering into an agreement with authorities, the lawbreakers are not exempt from claims and indemnification suits seeking loss recover, mainly by damaged investors. Such Plea Deals can even be strengthening civil cases against the companies if used as evidence of misconduct and intent.
After analyzing the list of Brazilian companies with securities traded in the United States, we noticed – through an independent research – that 39 are currently under investigation or recently were charged for corruption crimes. Of all these companies, at least 5 signed Plea Deals with government authorities confessing their criminal practices and agreeing on paying a fine.
Despite these facts, noticeably no lawsuits (filed by damaged securities investors) were found in the U.S. against most of these Brazilian companies. Also, after an independent research, we found that the following foreign companies involved in corruption-related schemes, curiously, have not been sued by damaged investors in their countries of origin where their securities are traded: (i) Toyo Engineering Corporation (Operation Carwash): part of a Joint Venture formed to perform contracts with Petrobrás, whose securities are traded at Tokyo’s Stock Exchange; (ii) Skanska Brasil (Operation Carwash): subsidiary of the Swedish company Skanska AB whose securities are traded at Stockholm’s Stock Exchange and ADRs in the OTC market in the US, and declared disreputable and ineligible by Brazilian Authorities (Controladoria Geral da União); (iii) Rolls-Royce (Operation Carwash) signed a plea deal with Brazilian authorities and its securities are traded in the London Stock Exchange.
Therefore, in view of Judge Rakoff’s ruling (Petrobras Securities Litigation No. 14-CV-9662) and applicable law, we believe that such decision is an important milestone for cases concerning companies that were involved in corruption schemes in Brazil that trade securities in the US, since it enables damaged investors to seek indemnification before US Courts. Naturally, and because of the continuing progress of Operation Carwash, we foresee a propensity of increasing claims and lawsuits of this nature in US Courts.
Gustavo de Lima Palhares
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