Brazilian oil company Petrobras' $17 billion write-down, announced last week, may have been meant to close the accounting on a sprawling corruption scandal, but could instead provide fresh ammunition for a U.S. class action lawsuit.
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.
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
