Brazilian Prosecutors Use U.S. Legal Tactics and Tools in Petrobras Corruption Scandal
7th April 2015
Petrobras (Petroleo Brasileiro S.A-NYSE ADR:PBR) is currently being investigated for a number of public corruption scandals. The biggest ones involve the oil giant’s gouging billions out of public coffers by allowing construction firms to over-charge for refineries in exchange for kickbacks. Offshore accounts were opened. Some are now in jail. And now two of the companies involved in the scheme, OAS and Galvao Engenharia, have filed for bankruptcy protection.
Senior executives at the Company are accused of taking bribes from Brazil’s largest construction firms, allowing them to skim perhaps billions of dollars from the state-controlled oil company through inflated contracts, unleashing a scandal that has caused political and economical uproar in Brazil. Nicknamed Operation Car Wash, the scandal has caused top management at Petrobras to resign; the Company’s stock has plummeted; projects have been cancelled and have led to thousands of layoffs, foreshadowing a recession.
So far, nearly 50 federal lawmakers and almost 230 businesses are under investigation, more than $700 billion may have been stolen, and write-downs of inflated values may total at least $1.2 billion.
Brazilian prosecutors, many of whom are U.S. trained, have brought and relied on tools from the U.S. legal system to Brazil, such as plea bargaining. Local media in Brazil have dubbed these prosecutors. Local media in Brazil call them the “Nine Horsemen of the Apocalypse”.
Brazil ranks 135th out of 144 countries in the proper use of public funds, according to a recent report by the Swiss-based World Economic Forum
The U.S. Securities & Exchange Commission (the “SEC”) continues to investigate Petrobras, which has lost $262 billion in market cap from its high of $310 billion in 2008. Petrobras stock is worth only $48 billion today.
The Company announced at the end of January in its SEC filings that on November 21, 2014, Petrobras received a subpoena from the SEC requesting certain documents and information about the Company. The Company announced that it intends to comply with the subpoena, working with independent Brazilian and U.S. law firms hired to conduct an independent internal investigation. The Company could also be charged with violations of the U.S. Foreign Corrupt Practices Act.
On December 8, 10, 12, and 24, 2014 and January 7, 2015, five putative securities class action complaints were filed in the United States District Court for the Southern District of New York against the company on behalf of investors in American Depositary Shares (ADSs) of the company that trade on the New York Stock Exchange. One of those actions is also brought on behalf of noteholders who purchased global notes issued by Petrobras’ finance subsidiaries in public offerings between 2012 and 2014. In general, each of the five complaints alleges, among other things, that in the company’s press releases, filings with the SEC and other communications, the company made materially false and misleading statements and omissions regarding the value of its assets, the amounts of the company’s expenses and net income, and the effectiveness of the company’s internal controls over financial reporting due to alleged corruption purportedly in connection with certain contracts, which allegedly artificially inflated the market value of the company’s securities. The complaints differ in terms of the identities of the named plaintiffs and the purported class periods they allege. The plaintiffs have not specified an amount of alleged damages in the actions.