For those funds that have owned or currently own the ADRs or debt of Petrobras S.A., the Brazilian state-owned oil company, there are important developments in the securities fraud cases against Petrobras that are pending in federal court in Manhattan. On Oct. 21, 2016, Petrobras announced that it has settled four out of the 27 separate securities fraud actions brought by institutions. Petrobras stated that it has reached settlements with Pimco, Janus, Dodge & Cox and Al Shams Investment Co. Petrobras further announced that it would record a $353 million reserve against third-quarter earnings to cover these and other potential settlements. Petrobras has repeatedly signaled publicly its intention to put the corruption scandal behind it, and these settlements are a step in that direction. Accordingly, there will likely be further settlements. At this time, individual settlements may be the best option for institutions, as the Second Circuit is now determining on an interlocutory basis whether to reverse the district court’s grant of class certification to investors in Petrobras’ securities, which covers purchases between Jan. 22, 2010, and July 28, 2015. On Nov. 2, 2016, the Second Circuit held oral argument on the issue, and the members of the panel expressed skepticism about whether class certification is appropriate given the difficulty of ascertaining on a class-wide basis who made U.S. purchases of Petrobras’ debt. If the court reverses class certification, investors that desire relief will have little choice but to file individual claims. The Second Circuit is considering the appeal on an expedited basis.
The securities fraud actions were brought after Brazilian prosecutors announced in the spring of 2015 that they had uncovered a massive bribery and kickback scheme whereby senior employees of Petrobras and the Workers Party of Brazil, which controlled the government and Petrobras, obtained hundreds of millions of dollars in bribes and kickbacks on innumerable Petrobras capital projects spanning many years. This scheme, which has been dubbed by Brazilians the “Lava Jato,” or car wash, scandal, has resulted in the indictment and conviction of numerous Petrobras employees and government officials.