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Petrobras Case Background

Overview of the Petrobras Corruption Scandal

Petrobras is a Brazilian oil company that is majority-owned by the Brazilian government. At its height in 2009, Petrobras was the world’s fifth-largest company, with a market capitalization of $310 billion. Now, amid a rampant money-laundering and kickback scheme, Petrobras is worth approximately $18.7 billion.

For nearly a decade, Petrobras allegedly engaged in a massive corruption scheme that went unchallenged until 2014, when, on October 27, 2014, it issued a press release stating that certain of its key executives were being investigated in connection with bribery and money laundering. Since then, prosecutors and federal police in Brazil have unearthed the country’s largest-ever corruption scandal by linking a ring of black-market money changers to a price-fixing and political kickback scheme at the state-run oil company.

Sworn testimony has revealed that Petrobras executives and Brazilian government officials accepted bribes from members of a cartel of construction companies in exchange for awarding inflated contracts to members of the cartel in connection with oil refinery construction, drilling rig construction, and other energy-related construction projects.

Brazilian federal police arrested the former head of Petrobras’ refining and supply department in March 2014. Since then, over 100 indictments have been issued by Brazilian authorities, and over a dozen executives linked to Petrobras have been convicted for offenses such as money laundering and racketeering. In November 2014, the SEC sent a subpoena to Petrobras requesting information about the widening corruption investigations, and the Financial Times reported that the United States Department of Justice (“DOJ”), which can bring criminal charges, opened an investigation into the company. Petrobras is expected to face the largest penalty ever levied by United States authorities, pursuant to the corruption investigation by the DOJ.

Dramatic Drop in Stock Price

Petrobras has listed various equity and debt securities that trade on BOVESPA (Brasil), LATIBEX (Bolsa Madrid Spain) and NYSE (US – ADSs). During the public’s discovery of the fraud, the stock experienced substantial price declines. During the months following the company’s October 27, 2014 press release, Petrobras’ stock price dropped by roughly half, resulting in a massive depletion of the company’s market capitalization and substantial losses to Petrobras’ investors who purchased equity and debt securities around the globe.


PETR3 2004-2016


Litigation Overview & Update: January 2018

On January 3, 2018, Petrobras announced that in connection with the losses investors suffered from the “Lava Jato” bribery scandal, it had agreed to a USD 2.95 Billion settlement with investors who purchased American Depository Shares (ADS) and bonds in the US. The US settlement is a commendable and positive development, but it only provides recoveries for claims by purchasers in the United States and by purchasers of Petrobras securities that are listed for trading in the United States. The US issued and traded securities represent a limited portion of Petrobras global securities and related investor losses. The majority of investor losses occurred from trading in the Petrobras securities including Preferred and Common shares traded on the Brazilian exchange in São Paulo, European-regulated exchanges and bonds issued by Petrobras Global Finance, which is headquartered in the Netherlands, not in Brazil. The underlying fraud and events are the exact same and Petrobras should treat its investors equally. Petrobras should therefore compensate its investors regardless of which exchange, or in which country, they purchased Petrobras shares or bonds.

In January 2017, Stichting Petrobras Compensation Foundation (SPCF), backed by a coalition of international investors and law firms, started legal action against Petrobras and filed a Writ of Summons in District Court in Rotterdam, seeking declaratory relief for global investors who purchased Petrobras securities in non-US markets or on non-US exchanges. The litigation in the Netherlands covers the principal Petrobras equity securities that traded on the BOVESPA exchange in São Paulo and via linked markets such as Latibex on Bolsa De Madrid. The litigation in the Netherlands also covers the claims of bondholders whose losses are not included in the US litigation.

SPCF has appointed International Securities Associations & Foundations Management Company for Damaged Petrobras Investors (Bovespa) Ltd. (ISAF) to coordinate with investors. ISAF has organized the funding of all litigation costs so that investors can participate with no upfront cost.

Institutional investors currently supporting the Dutch litigation via the ISAF organized coalition include investors in the US, UK, Brazil, Netherlands, France, Germany, Spain, Italy, Nordic countries, Korea, Japan and others with individual losses ranging in the millions, tens of millions and in some instances in excess of USD 100 million.

Jurisdictional Analysis

SPCF’s decision to pursue litigation against Petrobras in Holland and not in Brazil is based on the factors enumerated below. SPCF, ISAF and the investor coalition supporting the litigation in the Netherlands have concluded that the Netherlands is the optimal jurisdiction in which to pursue compensation for damaged Petrobras investments. These opinions are based on extensive legal analysis (provided by outside counsel experienced in international law and bilateral investment treaties) as well as representations from other institutional investors who undertook similar analyses and ultimately rejected pursuing their claims in Brazil.

The primary factors that support the legal strategy to assert claims against Petrobras in the Netherlands include:
1. No fair trial or remedy for damaged minority shareholders in Brazil;
2. Petrobras operates in the Netherlands and marketed securities to European investors through subsidiaries in the Netherlands, and;
3. Petrobras is subject to European regulatory authorities pursuant to various of its securities being listed on European securities markets.

No Fair Trial or Remedy in Brazil

  • Petrobras bylaws mandate arbitration of shareholder disputes to be held in Brazil under the rules of the market Arbitration Chamber of the Bovespa
  • There exist very significant conflicts of interest between Petrobras and the Bovepsa – not least of which is that both are Brazilian State Owned Entities
  • Lack of recourse under international investment treaties

Petrobras Operates in the Netherlands

Petrobras has strong connections with the Netherlands. The majority of Petrobras’ activities situated outside Brazil are structured via the Netherlands (Rotterdam). Moreover, Petrobras raises debt capital from investors via its Dutch subsidiary, Petrobras Global Finance (PGF). Petrobras (the Brazilian entity) has issued an unconditional guarantee towards the debenture holders for the fulfillment of PGF’s obligations. Providing additional nexus to the Netherlands, the Petrobras corruption scandal reached into Holland via a Dutch company, SBM Offshore, which bribed Petrobras executives and ultimately settled with Dutch regulators for USD 240 million, the largest anti-corruption settlement in Dutch corporate history. Petrobras continues significant operations in the Netherlands to this day.

Petrobras is Subject to European Securities Regulators

The Spanish Securities Market Act (“Ley del Mercado de Valores” or “LMV”) stipulates the regulatory framework to be met by all issuers offering securities to the Spanish investing public. The Spanish financial supervisory legislation is strongly influenced by (the implementation of) European legislation that followed the introduction of the European Market in Financial Instruments Directive (MiFID) in 2007. The objective of this directive includes (among other things) the protection of investors. A number of Petrobras Securities are traded on the Latibex, part of the Bolsa (Madrid) which provides a platform for South American listed companies to offer their shares in Europe. Because of Petrobras’ listing on the Latibex in 2002, Petrobras Investors did (and could) assume that Petrobras complied with the European supervisory legislation implemented in the LMV as well as the Spanish supervisory legislation, including the MiFID in 2007. Petrobras is further subject to European securities laws and regulations due to the listing of Petrobras Securities on the Luxembourg Stock Exchange (“LSE”) via its obligations pursuant to Luxembourgish regulations. By publishing its financial statements to the Luxembourg Stock Exchange website, Petrobras further deceived investors transacting on European exchanges.

In addition to the preceding facts that support the Netherlands as the proper jurisdiction to pursue these claims, SPCF and the ISAF investor coalition believe that the Dutch court will consider that damaged investors have little to no recourse to pursue similar claims in Brazil. Whereas the Netherlands has a sophisticated judiciary that has adjudicated many disputes between classes of minority shareholders and companies who have allegedly caused damages to minority shareholders through fraudulent acts or otherwise violated European securities laws and regulations.