Over the past eight months, Brazil’s state-run oil company Petroleo Brasileiro, SA (Petrobras) has become the center point of a far-reaching corruption scandal that has implicated senior executives, other companies, and high-level members of the country’s ruling party. Even as Brazil’s Federal Police and the US Department of Justice dig deeper with criminal probes, one group isn’t waiting for federal agents to do their fighting for them.
Amid allegations of rampant bribery and kickback schemes at the Brazilian energy giant, investors (and the law firms backing them) are filing securities class action suits on the grounds they were misled, and that the corruption and generally poor management have contributed to plunging stock prices.
Such lawsuits, likely to originate in the US, are expected to increase domestically and abroad as prosecutors and regulators around the globe more aggressively crack down on corporate misdeeds, say attorneys and analysts.
Last week, US law firm Wolf Popper LLP filed a suit in the US District Court for the Southern District of New York on behalf of all persons who purchased American Depository Shares of Petrobras on a US exchange from May 2010 to November 2014.
The action uses allegations of violations of the US Securities Exchange Act to try to recover what lawyers say are hundreds of millions of dollars. Since then, five other US law firms have filed suit on behalf of American investors.
The lead attorney for Wolf Popper’s Petrobras securities case, Robert Finkel, explained that the US is not the only country filing these types of lawsuits, but it is more favorable to the claims than other countries.
“We have a system where investors are automatically included unless they opt out, whereas in some countries you have to opt in [to be a plaintiff],” Finkel said. “They also sometimes have limitations on contingency fees and sometimes even the plaintiff has to pay if they lose the case.”
Petrobras corruption may extend to highest levels of management
The current probe in Petrobras home country seeks to confirm whether funds from hefty company contracts were pilfered and kept in the coffers of newly re-elected President Dilma Rousseff’s Workers’ Party.
Twenty arrests have been made in connection with the investigation, including two former executives of the company. The Federal Police estimate that the company has lost $3 billion from corrupt acts.
The allegations have made waves across international markets, as Petrobras stock prices plummeted to their lowest value in a decade, closing at 11.36 reais last week. The Prosecutor General in Brazil said that senior management will eventually be replaced and “the response to those who raided Petrobras will be firm, from Brazil’s justice and abroad.”
The bribery probe has also had a ripple effect abroad. Last month the US Department of Justice opened a criminal investigation on the company, as well as the US Securities and Exchange Commission (SEC), which is pursuing a civil investigation.
Any formal actions taken in the US and other jurisdictions, coupled with a declining stock price, increase the chances that investors will lose money and could seek legal redress, individually or en masse.
Lawsuits targeting non-US companies on the rise
In a securities fraud class action, the quantity of plaintiffs usually doesn’t make a difference to the success of the case, since the lawsuit is typically combined into a single case on behalf of all investors, according to attorney Phillip Kim at the Rosen Law firm.
Kim is part of the legal team that filed a class action lawsuit against Tesco, PLC, a British company that overstated its accounts by $422 million. The plaintiffs in the case qualify as investors who overpaid for securities bought on US exchanges.
“It’s not the first and it won’t be the last case,” Kim said about the Tesco class action suit.
“Whether it’s foreign or domestic, there are US investigations that almost always result in some sort of litigation.”
Other securities law experts agree that it’s nothing new for investors to file a claim for damages once a company is in the spotlight for some bad behavior. Kevin LaCroix, an attorney and executive vice president of RT ProExec, an insurance intermediary focusing on management liability issues, says that these kinds of cases are not abnormal.
What is unique, he notes in his blog D&O Diary, is that more lawsuits in the US are following investigations being led by governments other than that of the United States. Not only are these cases being spurred by foreign regulatory activity, but they are based on foreign corporate activity as well. Out of 11 new securities lawsuits filed since Nov. 24, 2014, eight have been non-US companies.
Overall in 2014, 30 securities class action lawsuits filed involved non-US companies out of 160 so far, according to LaCroix. Although there are a number of examples of these kind of follow-up investor loss claims, LaCroix said the Petrobras class action suit has a rather unique level wrinkle.
“What is particularly interesting about the Petrobras case is that it represents a securities lawsuit filed against a non-US company based on disclosure surrounding a regulatory investigation outside the United States,” LaCroix writes.
With regulators seeking closer cross-border cooperation, and enforcement actions on the rise in variety of sectors, similar cases in the near future are likely. There have been various examples this year, such as the class action lawsuit on two Chinese companies – Nu Skin Enterprises and China Mobile Games following Chinese government probes on fraud and graft, respectively.
Class action cases taken up in other nations
As the domino effect of investigations following in securities actions increases, so does the increase in securities actions abroad, perhaps following a pattern that used to be US-centric. According to Brazilian newspaper O Globo, two investors in Brazil this week sued Petrobras for indemnity, although there is no option for a class action lawsuit in the country.
The lawsuit filed in Manhattan last week was brought by a single investor, Peter Kaltman. The complaint said he bought Petrobras ADRs and that the company made false statements regarding its value that misled investors who lost money when the corruption scandal became public.
Because of the admission by the company that it may have to adjust its historical financial statements to recognize the overpricing of construction contracts, Petrobras ADSs have declined from a close of $19.38 on September 5, 2014 to a closing price of about $7 as of December 18, 2014.
Finkel said that stock movement is one of the most important factors in the success of a securities class action lawsuit.
“Usually what I look for is stock price movement in volume when new information comes out,” Finkel said. “You have to look at the trading on different days to see how it’s related. We look at the volumes of the trading and what commentators on the markets say.”
While government investigations and securities suits may share similar alleged wrongdoing, they often have two very different objectives. While the Brazilian government and the US government may be trying to prosecute those who were involved in corruption at Petrobras, the private law firms who file securities claims seek compensation for their wronged clients.
However, the nature of these claims is that they are derivative of a larger financial crime. They may also affect the enforcement of financial crime, said Kim, of Rosen. “If there is a US investigation, they won’t share private information with plaintiffs unless there’s a formal court order,” Kim said. “But they’re more opportunities to cooperate on international investigations.”