Kaltman v. Petroleo Brasileiro S.A.- Petrobras
Filing
194
OPINION: Accordingly, in its Order of July 9, 2015, the Court granted defendants' motion to dismiss Counts III through V on the basis of the mandatory arbitration provision of the Company's bylaws, but denied defendants' motion to dismiss the Exchange Act Claims pursuant to that provision. For the foregoing reasons, the Court, by Order dated July 9, 2015, granted in part and denied in part defendants' motion to dismiss. (Signed by Judge Jed S. Rakoff on 7/30/2015) (ama)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------x
In re: PETROBRAS SECURITIES
LITIGATION
OPJ UON
JED S. RAKOFF, U.S.D.J.
Ltd.
("USS") brings this putative class action against the Brazilian
state-owned oil company Petr6leo Brasileiro S.A. - Petrobras
("Petrobras" or the "Company"); two of Petrobras' wholly-owned
subsidiaries, Petrobras Global Finance, B.V.
Petrobras International Finance Company
("PGF") and
s. A. ( "PifCo") 1 ; various
former officers and directors of Petrobras and its subsidiaries
(the "Individual Defendants")
2 ;
Petrobras' independent auditor,
Petrobras, PGF, and PifCo are referred to collectively as the
"Petrobras Defendants."
1
Specifically, the Individual Defendants are: Petrobras Chief
Executive Officer ("CEO") Maria das Gracas Silva Foster,
Petrobras CEO Jose Sergio Gabrielli, Petrobras Chief Financial
Officer ("CFO") Almir Guilherme Barbassa, Petrobras director
Josue Christiano Gomes da Silva, Petrobras director Silvio
Sinedino Pinheiro, PifCo Chairman and CEO Daniel Lima de
Oliveira, PifCo director Jose Raimundo Brandao Pereira, PifCo
CFO Servio Tulia da Rosa Tinoco, PifCo Chief Accounting Officer
Paulo Jose Alves, PifCo Chief Accounting Officer Mariangela
Monteiro Tizatto, PGF CEO and "Managing Director A" Gustavo
Tardin Barbosa, PGF CFO and "Managing Director B" Alexandre
Quintao Fernandes, PGF "Managing Director A" Marcos Antonio
Zacarias, PGF "Managing Director B" Cornelis Franciscus Jozef
Looman, and authorized United States Representative Theodore
Marshall Helms.
2
1
PricewaterhouseCoopers Auditores Independentes ("PwC"); and the
underwriters
of Petrobras's note offerings (the "Underwriter
Defendants") . 3 Plaintiffs allege that Petrobras was at the center
of a multi-year, multi-billion dollar bribery and kickback
scheme, in connection with which defendants made false and
misleading statements in violation of the Securities Exchange
Act of 1934 ("Exchange Act"),
the Securities Act of 1933
("Securities Act"), and Brazilian law.
Between December 8, 2014 and January 7, 2015, five separate
class action complaints were filed in this Court asserting
substantially similar claims against defendant Petrobras for
violation of the federal securities laws. See Kaltman v.
Petrobras, No. 14-cv-9662 (S.D.N.Y. filed Dec. 8 / 2014)
I
Ngo v.
Petrobras, No. 14-cv-9760 (S.D.N.Y. filed Dec. 10, 2014);
Messing V. Petrobras, No. 14-cv-9847 (S.D.N.Y. filed Dec. 12,
2014); City of Providence v. Petrobras et al•/ No. 14-cv-10117
(S.D.N.Y. filed Dec. 24, 2014); Kennedy v. Petrobras, No. 15-cv93
(S.D.N.Y. filed Jan. 7, 2015). By Order dated February 17,
Specifically, the Underwriter Defendants are: BB Securities
Ltd., Citigroup Global Markets Inc., J.P. Morgan Securities LLC,
Itau BBA USA Securities, Inc., Morgan Stanley & Co. LLC,
Santander Investment Securities Inc., HSBC Securities (USA)
Inc., Banco Votorantim Nassau Branch, Mitsubishi UFJ Securities
(USA), Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Standard Chartered Bank, Bank of China (Hong Kong) Limited,
Banco Bradesco BBI S.A., Banca IMI S.p.A., and Scotia Capital
(USA) Inc.
3
2
2015, the Court consolidated the five related cases under the
above caption.
In accordance with the Private Securities Litigation Reform
Act ("PSLRA"), 15 U.S.C.
§
78u-4(a)(3), the Court received
motions by members of the putative class for appointment as lead
plaintiff. Following full briefing and oral argument, the Court,
by Order dated March 4, 2015, appointed USS as lead plaintiff
and approved its choice of lead counsel, the reasons for which
it explained by Memorandum dated May 17, 2015. See ECF No. 99;
In re Petrobras Secs. Litig., No. 14-cv-9662, 2015 WL 2341359
(S.D.N.Y. May 17, 2015)
On March 27, 2015, USS filed its Consolidated Amended
Complaint ("CAC"), which named additional plaintiffs Union Asset
Management Holding AG ("Union") and the Employees' Retirement
System of the State of Hawaii ("Hawaii ERS") with respect to the
claims brought under the Securities Act. ECF No. 109. Plaintiffs
then moved to lift the mandatory stay of discovery imposed by
the PSLRA with respect to documents that defendants had already
produced to regulatory, governmental, or investigative agencies,
and requested permission to initiate discovery requests on
foreign non-parties pursuant to the Inter-American Convention on
Letters Rogatory and the Hague Convention on the Taking of
Evidence Abroad in Civil and Commercial Matters. The Court
3
denied plaintiffs' motion by Memorandum Order dated April 13,
2015. ECF No. 137.
The Petrobras Defendants and the Underwriter Defendants
then moved to dismiss the CAC pursuant to Rules 8,
9(b),
12 (b) (1), and 12 (b) (6) of the Federal Rules of Civil Procedure.
By "bottom line" Order dated July 9, 2015, the Court granted in
part and denied in part defendants' motion. ECF No. 189. This
Opinion explains the reasons for these rulings on the motion to
dismiss.
The CAC alleges facts relevant to plaintiffs' claims under
the Exchange Act and Brazilian law (which are asserted only by
USS) separately from those relevant to their claims under the
Securities Act (which are asserted by USS, Union, and Hawaii
ERS) . The Court first summarizes the factual allegations
relevant to USS's Exchange Act and Brazilian law claims. 4
Defendant Petrobras is a corporation organized under the
laws of Brazil, whose common and preferred shares are listed on
the Brazilian stock exchange ("Bovespa"). CAC
~
26. In addition,
Petrobras sponsors American Depository Shares ("ADS"),
representing its common and preferred equity,
that are listed on
the New York Stock Exchange ("NYSE"). Id. At its height in 2009,
At the time this motion was filed, PwC had not yet been served
and it did not join in the instant motion. Accordingly, the
Court does not discuss plaintiffs' allegations that are relevant
only to PwC.
4
4
Petrobras's market capitalization was approximately $310
billion, making it the
world's fifth-largest company. Id.~ 2.
USS alleges that, following the disclosure of rampant fraud and
corruption at the Company, which led to the arrest of high-level
Petrobras executives and prompted investigations by Brazilian
and U.S. authorities, the Company's worth declined to $39
billion. Id.
~~
2-14.
The alleged corruption scheme was as follows. Before and
during the period from January 22, 2010 through March 19, 2015
(the "Class Period"), Petrobras, particularly its Services and
Supply and International Divisions, pursued plans to expand its
petroleum production capacity, which involved acquiring and
contracting for the construction of new facilities and petroleum
production assets. Id.
~
20. However, there were only a limited
number of companies in Brazil with the technical capability to
complete such large-scale projects. Id.
~
49. Those companies
formed a cartel for the purpose of circumventing Petrobras'
competitive bidding process. Id. They did this with the help of
certain corrupt Petrobras officials, in particular, former Chief
Downstream Officer and Director of Supply Paulo Roberto Costa,
former Chief Services Officer Renato de Souza Duque, former
Director of the International Division Nestor Cervera, and
former executive in the Engineering and Services Division Pedro
5
Barusco (collectively, the "Corrupt Executives"). Id. , , 8-10,
50.
According to the CAC, the Corrupt Executives would apprise
the cartel members of the estimated cost that Petrobras assigned
to a project. Id. 66. The cartel members would then agree
amongst themselves which company would win the contract and
adjust their bids to conform to Petrobras' parameter allowing
for a 15-20% profit above that figure.
Id. , , 50-51. On top of
that profit, they would build into the winning bid a "three
percent political adjustment," which would be used to pay
kickbacks to the Corrupt Executives and their political patrons,
known as "Padrinhos," or Godfathers, within the Brazilian
political parties. Id. ,, 50-51, 62.
Under Petrobras' system of political patronage, each of the
company's seven divisions, known as Directorates, was allocated
to one of the political parties forming the majority coalition:
the Partido Progressista ("PP"), the Partido do Movimento
Democratic Brasileiro ("PMDB"), and the Partido dos
Trabalhadores ("PT"). Id. , 65. Because the Brazilian government
was Petrobras' majority shareholder, the political parties had
the power to appoint the directors of the divisions under their
control, as well as to nominate all members of Petrobras' Board
of Directors, including its President. Id. , 63. In return for
the parties' sponsorship of their careers,
6
individual executives
were expected to provide kickbacks to the parties by diverting
Company funds from works and
contracts under their control. Id.
The CAC alleges that the corruption scheme resulted in
Petrobras drastically overpaying for several refineries that it
acquired or built during this time period. For example, in 2006,
Petrobras acquired a refinery in Pasadena, Texas for a total of
$1.18 billion, including interest and legal fees, when a Belgian
oil company had purchased the same refinery just a year earlier
for only $42.5 million. Id.
~
75. Petrobras officials allegedly
approved the inflated purchase price after accepting bribes. Id.
The cost of another refinery, the Abreu e Lima refinery in
Pernambuco, Brazil, allegedly increased from $4 billion to over
$18 billion largely because of padded contracts awarded to
cartel companies. Id.
~
84. Similarly, Petrobras will be obliged
to spend sixty percent more than it originally budgeted at one
of the refineries comprising the Complexo Petroquimico do Rio de
~
Janeiro ("Comperj Project"). Id.
90. An audit of the Comperj
Project found irregularities in several contracts and a lack of
effective controls. Id.
The CAC further alleges that the Individual Defendants were
alerted to the fraud at the Company. For example, a former
Petrobras manager, Venina Velosa da Fonseca, testified that she
met with Defendant Foster, who was then in charge of the energy
and gas division and reported to then-CEO Gabrielli, to tell her
7
about inf lated contracts and payments for services that had not
been carried out.
~~ ~ 92.
Fonseca claimed that she had
repeatedly reported problems with bidding and contracts to her
superiors for five years, and was transferred to Singapore and
ultimately fired in retaliation. Id.
~
93. She allegedly
forwarded her complaints to CEO Gabrielli.
Id.~
98. He created a
committee to investigate, which found that the Company had paid
R$ 58 million for communication services that were not
performed. Id. However, the employee responsible for the
embezzlement was kept on Petrobras' payroll for several years
~
thereafter. Id.
101. Similarly, a confidential informant
reported that, in 2005, a PT politician in Rio took his concerns
about bribery and corruption related to the Pasadena refinery
purchase directly to Gabrielli, who was then Petrobras'
President. Id.
~
81.
The corruption scheme was eventually uncovered as part of
an extensive money-laundering investigation by the Brazilian
Federal Police known as Operation "Lava Jato," meaning "car
wash." Id.
~
4. As the details of the scheme slowly emerged, the
price of Petrobras' securities suffered decline after decline.
Id.
~~
283-48. Over the course of the Class Period, the price of
Petrobras' common ADS fell by 80.92% and the price of its
preferred ADS fell by 78.01%. Id. at 349.
8
USS alleges that defendants made two categories of false
and misleading statements. First, it alleges that the corruption
scheme rendered the Company's financial statements materially
false and misleading. Id. ~ 109. Specifically, it alleges that
Petrobras, in accordance with International Financial Reporting
Standards, accounted for costs related to the construction,
installation, and completion of oil and gas infrastructure as
part of the carrying value of its property, plant and equipment
("PP&E") on the Company's balance sheets. Id. ~~ 110-13. Because
the amounts that Petrobras paid for its construction contracts
were inflated by the bribe payments and overcharges from the
cartel, however, the reported value of its PP&E was
correspondingly inflated. Id. ~~ 114, 139. USS alleges that on
January 28, 2015, Petrobras issued a statement acknowledging
that it will be necessary to make adjustments to its financial
statements to correct the carrying values of its fixed assets.
Id.
~
3 3 9.
Second, the CAC alleges that Petrobras made false and
misleading statements regarding the integrity of its management
and the effectiveness of its financial controls.
Id.~
140. For
example, the Company allegedly made statements to reassure
investors that its operations were conducted with full
transparency and in compliance with applicable laws and
regulations, and also touted its Code of Ethics and corruption
9
prevention program. Id. ~~ 140-50. Furthermore, Petrobras
repeatedly represented that it maintained effective internal
controls and procedures, when in fact those controls and
procedures suffered from material weaknesses. Id.~ 152-56.
On the basis of the above allegations, USS asserts two
causes of action on behalf of all persons and entities who
purchased or otherwise acquired Petrobras securities on the NYSE
or pursuant to other domestic transactions during the Class
Period: violation of Section lO(b) of the Exchange Act and
Securities and Exchange Commission ("SEC") Rule 10b-5(b)
promulgated thereunder against Petrobras, PGF, and the
Individual Defendants (Count I); and violation of Section 20(a)
of the Exchange Act against defendants Gabrielli, Foster, and
Barbassa (Count II) .
USS further asserts four causes of action under Brazilian
law on behalf of all persons or entities who, in addition to
purchasing Petrobras securities on the NYSE or pursuant to
domestic transactions, also purchased or otherwise acquired
Petrobras securities on the Bovespa during the Class Period:
violation of the Brazilian Corporate Law and the regulations of
the Brazilian Securities and Exchange Commission
Valores
Mobili~rios"
("Comiss~o
de
or "CVM") against the Individual Defendants
(Count III); violation of the Brazilian Civil Code against
Petrobras (Count IV); violation of the Brazilian Corporate Law,
10
CVM Regulations, and Brazilian Civil Code against Petrobras
(Count V); and violation of
the Brazilian Securities Law, CVM
Regulations, and the Brazilian Civil Code against PwC (Count
VI).
Turning to the Securities Act Claims, plaintiffs USS,
Union, and Hawaii ERS assert that their allegations under the
Securities Act are "in effect a separate complaint," and state
that they "do not incorporate any of the allegations" pled in
relation to the Exchange Act and Brazilian law claims. Id.
~
388. With respect to these claims, they disclaim "any
allegations of fraud or scienter" or "any other deliberate and
intentional misconduct." Id. ~ 389.
Nonetheless, the factual allegations regarding the
corruption scheme and its effect on Petrobras' balance sheet are
substantially similar to the facts that USS alleges with respect
to the Exchange Act and Brazilian law claims. Plaintiffs allege
that, for years, Petrobras routinely awarded inflated contracts
to a cartel of construction and engineering firms in exchange
for those firms making hundreds of millions of dollars in
improper and undisclosed payments to corrupt Petrobras
executives and Brazilian political parties. Id.
~~
395-96. This,
plaintiff alleges, occurred as a result of Petrobras' culture of
political patronage, whereby Company executives were promoted on
11
the basis of political sponsors who, in exchange, demanded
contributions to their campaign funds. Id.
~
397.
The contracts were allegedly inflated by "as much as 20%,"
with the result that the reported carrying value of Petrobras'
PP&E, expenses, and net income were materially false and
misleading. Id.
~
405. Plaintiffs further allege that defendant
Foster has acknowledged that the bribe payments were improperly
recognized as part of the cost of the Company's fixed assets and
will require adjustment. Id.
~
404. The Company, plaintiffs
allege, is facing an asset write-down that "may reach $30
billion." Id.
~
405. In addition, the fact that Petrobras did
not report the overpayments as immediate expenses resulted in
its expenses appearing lower and its net income higher during
the periods in which the inflated payments were made. Id.
~
406.
The allegedly false and misleading statements that form the
basis for plaintiffs' Securities Act Claims were made in
offering documents for several Notes Offerings between 2012 and
2014. Specifically, the Petrobras Defendants offered notes
pursuant to prospectus supplements with the SEC on February 3,
2012
(the "2012 Notes Offerings"), on May 15, 2013
Notes Offerings), and on March 11, 2014
(the "2013
(the "2014 Notes
Offerings"). Id. ~~ 408-18. The registration statements and
prospectus supplements that Petrobras filed with the SEC in
connection with these Notes Offerings (collectively, the
12
"Offering Documents")
incorporated by reference other documents
such as Annual Reports on Form 20-F and reports on Form 6-K that
the Petrobras Defendants filed with the SEC during the relevant
periods. Id. ~~ 411, 415, 418.
Plaintiffs allege that the documents incorporated by
reference into the Offering Documents contained numerous false
and misleading statements. Specifically, those documents
contained representations regarding Petrobras' total assets,
including net PP&E, its total costs and expenses, including
depreciation, depletion, and amortization, and its net income.
Id.
~~
477, 482, 484, 488, 490, 494, 496. Plaintiffs allege that
such statements were materially false and misleading because
Petrobras included the cost of improper payments in the value of
its assets, as described above.
The Offering Documents further incorporated
representations, for example, that the Company's internal
control over financial reporting was effective and also
incorporated by reference Petrobras' Code of Ethics, pursuant to
which it undertook to "conduct its business with transparency
and integrity," to "register its reports and statements in a
correct, consistent, accurate and complete way," and to "refuse
any corrupt and bribery practices" and "refuse support and
contributions to political parties." Id.
~~
478-79, 485, 491,
498. Finally, on March 11, 2014, Petrobras filed a form 6-K,
13
which incorporated a statement that neither Petrobras nor any of
its officers had engaged in corruption, made any bribe or
unlawful payment, or violated any provision of certain U.S.,
U.K., and Brazilian anti-corruption laws. Id. ~ 500. These
statements, plaintiffs allege, were materially false and
misleading because Petrobras had,
in fact, engaged in rampant
corrupt activities and utterly lacked effective controls.
On the basis of these allegations, plaintiffs assert three
Securities Act causes of action: violation of Section 11 of the
Securities Act against the Petrobras Defendants, the Individual
Defendants, the Underwriter Defendants, and PwC (Count VII);
violation of Section 12(a) (2) of the Securities Act against
defendants Petrobras and PGF (Count VIII); and violation of
Section 15 of the Securities Act against defendants Foster,
Gabrielli, and Barbassa (Count IX).
Exchange Act Claims. Defendants moved to dismiss the
Exchange Act Claims for failure to state a claim upon which
relief may be granted. Fed. R. Civ. P. 9(b), 12(b) (6). To
survive a motion to dismiss,
"a complaint must contain
sufficient factual matter, accepted as true, to 'state a claim
that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S.
662, 678
(2009)
544, 570
(2007)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S.
"In considering a motion to dismiss ... the court
is to accept as true all facts alleged in the complaint" and
14
must "draw all reasonable inferences in favor of the plaintiff."
Kassner v. 2nd
Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d
Cir. 2007). However, mere conclusory statements and "formulaic
recitation[s] of the elements of a cause of action" will not
suffice. Twombly, 550 U.S. at 555.
Furthermore, Section lO(b) claims are subject to the
heightened pleading standards of Rule 9(b) and the PSLRA.
Accordingly, to state a claim for violation of Section lO(b), a
plaintiff must "state with particularity the circumstances
constituting fraud or mistake." Fed. R. Civ. P. 9(b). The Second
Circuit has interpreted Rule 9(b) to require that a complaint:
"(1)
specify the statements that the plaintiff contends were
fraudulent,
(2) identify the speaker,
(3)
state where and when
the statements were made, and (4) explain why the statements
were fraudulent." Rombach v. Chang, 355 F.3d 164, 170 (2d Cir.
2004)
(citation and internal quotation marks omitted). In
addition, under the PSLRA, the plaintiff must "specify each
statement alleged to have been misleading [and]
the reason or
reasons why the statement is misleading." 15 U.S.C.
§
78u-
4 (b) (1).
Section lO(b) of the Exchange Act makes it unlawful to "use
or employ, in connection with the purchase or sale of any
security ... any manipulative or deceptive device or contrivance
in contravention of such rules and regulations as the Commission
15
may proscribe." 15 U.S.C. § 78j (b). SEC Rule lOb-5, which
implements the statute, prohibits
of a material fact or [omitting]
"mak[ing]
any untrue statement
to state a material fact
necessary in order to make the statements made,
in the light of
the circumstances under which they were made, not misleading."
17 C.F.R.
§
240.10b-5(b). In order to establish a claim under
these provisions, a plaintiff bears the burden to prove that
"(l) the defendant made a material misrepresentation or
omission;
(2) with scienter;
or sale of a security;
(4)
(3)
in connection with the purchase
reliance;
(5) economic loss; and (6)
loss causation." IBEW Local Union No. 58 Pension Trust Fund &
Annuity Fund v. Royal Bank of Scotland Grp.,
PLC, 783 F.3d 383,
389 (2d Cir. 2015).
With respect to the first element of an Exchange Act claim,
defendants argue that the CAC fails to plead any material
misrepresentation or omission.
"A statement or omission is
material if 'there is a substantial likelihood that a reasonable
shareholder would consider it important in deciding how to
act.'" Id.
(quoting ECA, Local 134 IBEW Joint Pension Trust of
Chicago v. JP Morgan Chase Co.,
553 F.3d 187, 197
(2d Cir.
2009)). Materiality is "a mixed question of law and fact and is
rarely a basis for dismissal on the pleadings." City of Pontiac
Gen. Employees' Ret. Sys. v. Lockheed Martin Corp.,
2d 359, 368
875 F. Supp.
(S.D.N.Y. 2012). A complaint may be dismissed for
16
failure to plead materiality only if "the misstatements are 'so
obviously unimportant
to
a
reasonable investor that reasonable
minds could not differ on the question of their importance.'"
Id.
As discussed above, Petrobras' allegedly false and
misleading statements fall into two categories: its financial
statements and its representations about the state of its
business and management. Plaintiffs allege that Petrobras'
financial statements misrepresented the value of the Company's
PP&E, expenses, and net income because the Company improperly
capitalized costs associated with payments to cartel members, to
the Corrupt Executives, and to political parties. Plaintiffs
allege that the Company's contracts with cartel companies were
inflated by as much as twenty percent, with the result that
Petrobras may be forced to book a $30 billion asset write-down.
CAC ~~ 5, 13.
Defendants argue that the public documents on which the CAC
expressly relies
~
most importantly, the testimony of Paulo
Roberto Costa, one of the Corrupt Executives who is now
cooperating with the investigation
~
do not support plaintiffs'
allegations. Where a complaint cites reports and testimony whose
"contents as public documents are not subject to reasonable
dispute," the Court may "consider them in determining the merits
and context of the allegations of the [complaint]
17
that are based
on them." IBEW Local, 783 F.3d at 390. In this case, defendants
correctly point out that Costa's testimony was not that the
cartel contracts were inflated by twenty percent, but rather
that, pursuant to its procurement guidelines, Petrobras would
consider bids up to twenty percent over its internal budget
estimate. See Declaration of Roger A. Cooper dated April 17,
2015
("Cooper Deel.") Ex. 5, at 4. Costa further testified that
the bribe payments added only three percent to the contract
price. Id. Thus, to the extent that plaintiffs characterize
Costa's testimony as stating that the contracts were
systematically inflated by up to 20%, defendants are correct
that the testimony itself belies that characterization.
However, it does not follow that Petrobras paid only three
percent more on the cartel contracts than it would have under an
honest bidding system. If the cartel companies were paying three
percent in bribes and kickbacks, it is reasonable to infer that
the corruption scheme allowed them to inf late the contract
prices by considerably more than three percent. Otherwise, the
bribery scheme would not be worth their while. This conclusion
is supported by Costa's statements, for example, that the
amounts paid for the works were "much higher than the real
values" and that, by virtue of the bribery scheme, the cartel
companies were able to "stretch[]" their profits "to the limit
the contracting enterprise allows." Declaration of Emma Gilmore
18
dated May 8, 2015
("Gilmore Deel.") Ex. 17, at 290-91. Thus, a
fair reading of Costa's testimony permits the inference that the
contracts were inflated by much more than three percent.
Defendants argue that the three percent bribe payment built
into the cartel contracts did not materially affect the accuracy
of Petrobras' financial statements. According to the SEC's Staff
Accounting Bulletin ("SAB") No. 99, which the Second Circuit has
deemed to be persuasive authority, the court should consider
both quantitative and qualitative factors in assessing a
statement's materiality. ECA, Local 134, 553 F.3d at 198-99
(citing SAB No. 99, 1999 WL 1123073). SAB No. 99 establishes a
"rule of thumb" that changes of less than five percent to
financial statements are presumptively immaterial. City of
Pontiac, 875 F. Supp. 2d at 368. However, SAB No. 99 recognizes
that a misstatement can be material even if does not cross the
five percent threshold and sets out relevant qualitative factors
such as "(1) concealment of an unlawful transaction,
(2)
significance of the misstatement in relation to the company's
operations, and (3) management's expectation that the
misstatement will result in a significant market reaction." ECA,
Local 134, 553 F.3d at 198.
In this case, plaintiffs' allegation that Petrobras
overstated the value of its assets by as much as $30 billion
relies on a statement that the Company made in January 2015. See
19
Cooper Deel. Ex. 8. However, as defendants point out, the
statement on
which plaintiffs rely does not, in fact, establish
that Petrobras' assets were overvalued by $30 billion. Instead,
the Company acknowledged that costs relating to improper
payments should not have been capitalized and that an asset
write-down may be necessary to correct this error. Id. at 11-12.
The statement discusses two methods for calculating the asset
write-down that the Company considered but ultimately decided
not to adopt. Id. at 11-12.
The first of those methods was to measure the difference
between the fair value and the carrying amount of Petrobras'
assets. Id. at 13. This method found that fifty-two of
Petrobras' assets had a fair value below their carrying amount,
for a total discrepancy of R$ 88.6 billion, or almost US $30
billion. Id. at 14. This, presumably, is the source of
plaintiffs' allegation. However, the January 2015 statement
explains that Petrobras decided not to adopt this method because
it was not capable of distinguishing discrepancies in valuation
of assets related to improper payments from those caused by, for
example, changed economic conditions. Id. at 13-14.
The second method that the January 2015 statement discusses
is to calculate the amount of bribes paid to the cartel based on
documents and testimony that have emerged in the course of the
investigation, including Costa's testimony that the bribe
20
payments accounted for about three percent of the value of the
Company's
contracts with the cartel companies. Id. at 12-13.
This approach would lead to an asset write-down of R$ 4.06
billion, or approximately US $1.3 billion. Id. at 13. Defendants
contend that $1.3 billion amounts to less than 0.7 percent of
Petrobras' total PP&E assets. However, the Company also rejected
this method because the investigation has not revealed
sufficient detail regarding the improper payments to support
recording an entry in its books and records. Id. at 13.
Based on the above,
it appears that plaintiffs' contention
that Petrobras faces an asset write-down of US $30 billion is
not supported by the document on which it relies. Nonetheless,
that document does not clearly establish, as defendants contend,
that the write-down will be lmited to US $1.3 billion. Thus, in
terms of the quantitative factors,
it is not clear whether
Petrobras' alleged misstatement reaches the five percent "rule
of thumb," though there is a plausible possibility that it
might.
In any event, however, the quantitative analysis is not
dispositive of materiality. Litwin v. Blackstone Grp., L.P., 634
F.3d 706, 714
(2d Cir. 2011). Here, the qualitative factors
strongly favor a finding of materiality. The errors in
Petrobras' financial statements were directly related to its
concealment of the unlawful bribery scheme, revelation of which
21
would "call into question the integrity of the company as a
whole." Strougo
v. Barclays PLC, No. 14-CV-5797 SAS, 2015 WL
1883201, at *10 (S.D.N.Y. Apr. 24, 2015). Moreover, the
misstatements related to the value of Petrobras' oil-producing
infrastructure, which is the core of its business. Finally,
plaintiffs allege that Petrobras' share price dropped
dramatically when news of the corruption scheme emerged,
indicating that investors did, in fact,
consider that
information to be material. Accordingly, the Court cannot
conclude that the alleged misrepresentations in Petrobras'
financial statements were immaterial as a matter of law.
With respect to Petrobras' general statements about its
business, defendants argue that these statements are not
actionable because they are either statements of opinion, mere
puffery, or forward-looking statements subject to the PSLRA's
"safe harbor" provision, 15 U.S.C. § 78u-5(c).
A statement of opinion is not materially false just because
it is incorrect unless it is not "honestly held" or omits facts
about the speaker's basis for holding that view, and those facts
conflict with what a reasonable investor would understand from
the statement itself. See Omnicare, Inc. v. Laborers Dist.
Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1327
(2015) . Defendants argue that many of their allegedly false and
misleading statements were statements of opinion, and that
22
plaintiffs have not plausibly alleged that those opinions were
not honestly held.
For example, they contend that Petrobras' alleged
statements regarding the effectiveness of its internal controls
are not actionable for this reason. See, e.g., CAC
~~
164, 184,
198, 251, 260. However, plaintiffs allege that at the time the
Company's management was professing its opinion that the
company's internal controls were effective, that same management
was well aware of the extensive corruption in the Company's
procurement activities. See, e.g. id.
~
158. These allegations
are sufficient to infer that the Company disbelieved the alleged
statements at the time they were made. See Varghese v. China
Shenghuo Pharm. Holdings, Inc., 672 F. Supp. 2d 596, 607
(S.D.N.Y. 2009)
(holding that plaintiffs plausibly alleged that
defendant's "internal control problems were much more serious
than the picture conveyed by its filings and press releases");
In re Scottish Re Grp. Sec. Litig., 524 F. Supp. 2d 370, 398
(S.D.N.Y. 2007)
(holding that "plaintiffs' factual allegations,
accepted as true, suggest that the Company recklessly or
intentionally misled investors as to the state of its internal
controls") .
With respect to puffery,
"[s]tatements of general corporate
optimism ... do not give rise to securities violations." IBEW
Local, 783 F.3d at 392; City of Pontiac Policemen's & Firemen's
23
Ret. Sys. v. UBS AG, 752 F.3d 173, 183 (2d Cir. 2014)
("It is
well-established that general statements about reputation,
integrity, and compliance with ethical norms are inactionable
'puffery,' meaning that they are 'too general to cause a
reasonable investor to rely upon them.'"). Defendants argue that
many of Petrobras' alleged statements are mere puffery. These
include statements that Petrobras established a commission
"aimed at assuring the highest ethical standards," CAC
~
141;
that it "adopts the best corporate governance practices," CAC
~
150; that it undertook to "conduct its business with
transparency and integrity" and to "refuse any corrupt and
bribery practices, keeping formal procedures for control and
consequences of any transgressions," CAC
~
165; that it was
"fully committed to implementing a fair and transparent
operation" and "will invest all of our resources with efficiency
and discipline," CAC
~
167; and that its Business and Management
Plan "is underpinned by realism, precise targets and rigorous
project management with capital discipline," CAC
~
206.
Whether a representation is "mere puffery" depends, in
part, on the context in which it is made. See Arkansas Teacher
Ret. Sys. v. Bankrate, Inc., 18 F. Supp. 3d 482, 485 (S.D.N.Y.
2014); U.S. Bank Nat. Ass'n v. PHL Variable Ins. Co., No. 12-cv6811, 2013 WL 791462, at *7 (S.D.N.Y. Mar. 5, 2013). While some
of the alleged statements, viewed in isolation, may be mere
24
puffery, nonetheless, when (as here alleged) the statements were
made repeatedly in an
effort to reassure the investing public
about the Company's integrity, a reasonable investor could rely
on them as reflective of the true state of affairs at the
Company. Accordingly, the Court cannot find that all of
Petrobras' alleged statements regarding its general integrity
and ethical soundness were immaterial as a matter of law. See
TSC Indus., Inc. v. Northway,
Inc., 426 U.S. 438, 450
(1976)
(noting that the issue of materiality "requires delicate
assessments of the inferences a
'reasonable shareholder' would
draw from a given set of facts and the significance of those
inferences to him, and these assessments are peculiarly ones for
the trier of fact") .
Finally, the PSLRA provides for a safe harbor for "forward
looking statements" if accompanied by "meaningful cautionary
statements," 15 U.S.C.
§
78u-5 (c) (1) (A), or if the plaintiff
does not properly allege that the speaker had "actual knowledge"
that the statement was false or misleading, id. § 78u5 (c) (1) (B). Such statements are defined to include "a statement
of the plans and objectives of management for future operations"
and "a statement of future economic performance." Id. § 78u5(i) (1) (B)-(C).
Defendants argue that some of the alleged material
misstatements are subject to the safe harbor provision. For
25
example, they highlight the allegations that Petrobras stated
that "the proper management of our project portfolio provides us
with the confidence that we will be able to achieve the goals of
2013-17 BMP, which will guarantee the returns expected by our
shareholders," CAC
~
224, and that the Company would "continue
with [its] efforts to recover the operational efficiency of the
Campos Basin and optimize operating costs," CAC
~
206. The Court
agrees with defendants that these two statements are protected
by the PSLRA's safe harbor for forward-looking statements
because there is no allegation that the speaker had actual
knowledge that they were false or misleading. This conclusion,
however, does not undercut the Court's broader conclusion that
plaintiffs have adequately pled material misstatements such that
their Exchange Act claims survive defendants' motion to dismiss.
With respect to the second element of an Exchange Act
claim, defendants argue that the CAC fails to plead scienter.
Scienter is "a mental state embracing intent to deceive,
manipulate, or defraud." Tellabs, Inc. v. Makor Issues & Rights,
Ltd., 551 U.S. 308, 319 (2007).
"When the defendant is a
corporate entity, this means that the pleaded facts must create
a strong inference that someone whose intent could be imputed to
the corporation acted with the requisite scienter." Teamsters
Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531
F.3d 190, 195 (2d Cir. 2008). The PSLRA provides that the
26
complaint must "state with particularity facts giving rise to a
strong inference
that the defendant acted with the required
state of mind." 15 U.S. C. § 7 Su-4 (b) ( 2) (A) . In making this
determination, a court considers whether "all of the facts
alleged, taken collectively, give rise to a strong inference of
scienter, not whether any individual allegation, scrutinized in
isolation, meets that standard." Tellabs, 551 U.S. at 323. When
so considered, the inference of scienter must be "cogent and at
least as compelling as any opposing inference one could draw
from the facts alleged." Id. at 324.
Defendants rely on the so-called "adverse interest"
exception to the general rule that a corporate executive's
scienter is attributable to the corporation. This exception
applies where "an officer acts entirely in his own interests and
adversely to the interests of the corporation." Kirschner v.
Grant Thornton LLP, No. 07-cv-11604, 2009 WL 1286326, at *5
(S.D.N.Y. Apr. 14, 2009) aff'd sub nom. Kirschner v. KPMG LLP,
626 F.3d 673
(2d Cir. 2010). Although defendants do not dispute
that the CAC adequately pleads scienter with respect to the four
Corrupt Executives who carried out the bribery scheme, they
argue that the adverse interest exception applies to the
Petrobras entities because the Corrupt Executives acted entirely
to benefit themselves and their political patrons, at the
Company's expense.
27
However,
"where a corporation benefits to any extent from
the fraudulent acts of
its agents, the agents cannot be said to
have 'totally abandoned' the interests of the corporation." Id.
at *6. In this case, the CAC plausibly alleges that, as a result
of the bribery scheme, the value of Petrobras' PP&E appeared to
be higher than it actually was, which in turn inflated the value
of Petrobras' securities. Thus, the inflation of the Company's
PP&E operated as a fraud on the investing public, not on
Petrobras itself. Moreover, the Corrupt Executives' failure to
correct Petrobras' various statements about its integrity, its
compliance with applicable laws and regulation, and the
effectiveness of its internal controls clearly benefitted the
Company, which was able to continue to attract investment and to
complete its large-scale expansion plans. See Stream SICAV v.
Wang, 989 F. Supp. 2d 264, 277
(S.D.N.Y. 2013).
Finally, the CAC alleges that Petrobras operated on a
system of political patronage. CAC
~
63. Each division of the
Company was aligned with one of the political parties forming
Brazil's government, which was also the Company's majority
shareholder. Id.
~
65. Accordingly, it is reasonable to infer
that the Company benefited from remaining in favor with its
political patrons. See Kirschner v. KPMG LLP, 15 N.Y.3d 446, 468
(Ct. App. 2010)
("So long as the corporate wrongdoer's
fraudulent conduct enables the business to survive
28
~
to attract
investors and customers and raise funds for corporate purposes -
- this test is not met."), Therefore,
the allegations of the CAC
do not conclusively establish that the Company received no
benefit from the Corrupt Executives' actions, as required to
render the adverse interest exception applicable.
Accordingly, the Court denied defendants' motion to dismiss
the Exchange Act claims for failure to plead materiality and
scienter.
Securities Act Claims. Defendants moved to dismiss the
Securities Act claims on a variety of grounds.
First, they moved to dismiss all of the Securities Act
claims in their entirety for failure to plead any materially
false or misleading statement. As defendants recognize, however,
the Securities Act claims rest on many of the same allegedly
false statements in Petrobras' financial statements as the
Exchange Act claims. Thus, plaintiffs' allegation that Petrobras
entered inflated contracts which, in turn, caused it to inflate
the reported value of its PP&E survives defendants' motion for
the same reasons as discussed above. Even though the contracts
may not have been inflated by the full twenty percent alleged by
plaintiffs, the CAC plausibly alleges that they were materially
inflated, and that such inflation was reflected in the Company's
financial statements. Similarly, the CAC plausibly alleges that
Petrobras' statements regarding its transparency and ethical
29
controls are sufficient for the same reasons discussed above.
See supra. That is all that is required
at this stage. 5
Second, defendants moved to dismiss certain of plaintiffs'
Securities Act claims on the ground that plaintiffs lack
standing to bring such claims. As to the Section 11 claims
(Count VII), defendants moved to dismiss plaintiffs' claims
regarding the 2012 Notes Offering on the ground that plaintiffs
lack standing to assert them. Section 11 provides that a
purchaser of a security may sue if the registration statement
"contained an untrue statement of a material fact." 15 U.S.C. §
77k(a). Section 11 creates strict liability for any defendant
who (1) signed the statement at issue;
(2) was a director,
person performing similar functions, or partner in the issuer at
the time the statement was issued;
(3) was named in the
statement, with that party's consent, as being or about to
become a director, person performing similar functions, or
partner;
(4) was an expert whose involvement was, with that
Defendants also argue that Petrobras' statement in the March
2014 Underwriting Agreement that neither Petrobras nor its
officers made "any direct or indirect unlawful payment to any
foreign or domestic government or official," CAC ~ 500, was not
false because the cartel members, and not Petrobras or its
officers, made the unlawful payments. However, the CAC alleges
that the cartel companies made those payments pursuant to an
understanding with the Corrupt Executives, squarely qualifying
them as "indirect" unlawful payments by Petrobras officers.
5
30
party's consent,
listed in the statement; or (5) was a statutory
underwriter of the security. Id.§ 77k(a) (1) - (5).
In order to have standing to sue under Section 11,
af termarket purchasers must be able to "trace their shares to an
allegedly misleading registration statement." Caiafa v. Sea
Containers Ltd., 525 F. Supp. 2d 398, 407
(S.D.N.Y. 2007).
Defendants argue that plaintiffs cannot trace their shares to
the 2012 Notes Offering. The 2012 Notes Offering, they argue,
was a "re-opening" of a previous notes offering. Because the
2012 Notes are indistinguishable from the earlier-offered notes,
the plaintiffs, according to defendants, will not be able to
trace their shares to the 2012 Notes Offering.
However,
the "pleading requirement for Section 11 standing
is satisfied by 'general allegations that plaintiff purchased
pursuant to or traceable to [a]
Caiafa,
525 F. Supp. 2d at 407
false registration statement.'"
(internal citation and quotation
marks omitted). At this stage, plaintiffs are not "required to
explain how their shares can be traced." In re Authentidate
Holding Corp., No.
July 14, 2006)
05-cv-5323, 2006 WL 2034644, at *7
(S.D.N.Y.
(citation and internal quotation marks omitted)
(emphasis added). Accordingly, plaintiffs' allegation that they
purchased the notes "pursuant to or traceable to the materially
false and misleading" registration statements suffices, at this
stage, to establish their standing under Section 11. CAC
31
~
528.
Defendants also argue that plaintiffs lack standing with
respect to the Section 12(a) (2)
12 (a) (2)
claims (Count VIII). section
imposes liability on anyone who "offers or sells a
security ... by the use of any means or instruments of
transportation or communication in interstate commerce or of the
mails, by means of a prospectus or oral communication, which
includes an untrue statement of a material fact." 15 U.S.C.
771. Standing to assert a Section 12(a) (2)
§
claim is limited to
persons who directly purchase securities from the defendant in a
public offering, rather than on the secondary market. Gustafson
v. Alloyd Co., Inc., 513 U.S. 561, 578
(1995). Here, plaintiffs
fail to allege that they purchased their shares in the public
offering, and therefore lack standing. See Pub. Employees' Ret.
Sys. of Mississippi v. Merrill Lynch & Co. Inc., 714 F. Supp. 2d
475, 484
(S.D.N.Y. 2010)
(finding allegation that plaintiffs
purchased securities "pursuant and/or traceable to" the
defective offering documents insufficient). However, the Court,
in its Order of July 9, 2015 granted plaintiffs leave to amend
to correct this defect if they can. 6
Third, defendants moved to dismiss plaintiffs' Securities
Act claims arising from the 2012 and 2013 Notes Offerings as
6
The Court considered defendants' other arguments regarding
plaintiffs' standing to bring Section 12(a) (2) claims and found
them to be without merit.
32
barred by the statute of limitations and/or the statute of
repose. As to the
statute of limitations, Section 11 and
12(a) (2) claims must be brought "within one year after the
discovery of the untrue statement or the omission, or after such
discovery should have been made by the exercise of due
diligence." 15 U.S.C.
§
77m. "The one-year limitations period
applicable to discovery of the violation begins to run after the
plaintiff 'obtains actual knowledge of the facts giving rise to
the action or notice of the facts, which in the exercise of
reasonable diligence, would have led to actual knowledge.'"
LC Capital Partners, LP v. Frontier Ins. Grp., Inc., 318 F.3d
148, 154 (2d Cir. 2003)
(emphasis omitted). Thus, as the first
complaint in this consolidated action was filed on December 8,
2014, the claims are time barred if plaintiff had actual or
constructive notice of them on or before December 7, 2013.
Defendants argue that representations that USS made in
support of its lead plaintiff application establish that it
should have discovered its claims before that date.
Specifically, USS sold all its preferred ADSs in October 2013.
In order to claim a loss in that class of securities, USS
asserted that there was a corrective disclosure in August 2013,
namely, a report in Epoca magazine on illegal transfers by
Petrobras to members of a Brazilian political party. USS
asserted that the Epoca report caused the price of preferred
33
ADSs to drop by over
published from
5~,
and that additional reports were
August through November 2013 containing similar
disclosures. Thus, defendants argue, USS's claims based on the
2012 and 2013 Notes Offerings are time-barred.
However, determining "whether a plaintiff had sufficient
facts to place it on inquiry notice is 'often inappropriate for
resolution on a motion to dismiss under Rule 12(b) (6) .'" LC
Capital Partners, 318 F.3d at 156. Here, determining whether the
Epoca report contained sufficient information about the fraud to
put plaintiffs on constructive notice would require the Court to
resolve complex disputes of fact. Moreover,
"[t]here are
occasions when, despite the presence of some ominous indicators,
investors may not be considered to have been placed on inquiry
notice because the warning signs are accompanied by reliable
words of comfort from management." Id. at 155. Thus, additional
factual disputes exist as to whether a reasonable investor would
have relied on the Company's statements regarding its
transparency and integrity such that they were not placed on
inquiry notice. Accordingly, the Court cannot determine, as a
matter of law, that plaintiffs were on inquiry notice of their
claims before December 7, 2013.
Section 11 claims are also subject to a statute of repose,
which provides that "[i]n no event" shall an action be brought
"more than three years after the security was bona fide offered
34
to the public." 15
u.s.c.
Offering was made on
§
77m. In this case, the 2012 Notes
February 1 1 2012, but plaintiffs did not
file the CAC until March 27, 2015, over three years later. The
so-called "American Pipe" doctrine, which provides that the
filing of a class action complaint tolls the statute of
limitations with respect to members of the putative class, does
not apply to statutes of repose. See In re IndyMac MortgageBacked Sec. Litig., 793 F. Supp. 2d 637,
642
(S.D.N.Y. 2011)
aff'd in part sub nom. Police & Fire Ret. Sys. of City of
Detroit v. IndyMac MBS, Inc., 721 F.3d 95
(2d Cir. 2013);
American Pipe and Construction Co. v. Utah, 414 U.S. 538
(1974)
Nor does the "relation back" doctrine apply, so plaintiffs may
not rely on the complaint filed by a different plaintiff, the
City of Providence, in one of the related cases. Id. Therefore,
the statute of repose bars plaintiffs' Section 11 claims based
on the 2012 Notes Offering.
Accordingly, in the Order of July 9, 2015, the Court denied
defendants' motion to dismiss plaintiffs' claims based on the
2012 and 2013 Notes Offerings as barred by the one-year statute
of limitations, but granted defendants' motion to dismiss
plaintiffs' claims based on the 2012 Notes Offering as barred by
the three-year statute of repose.
Fourth, defendants moved to dismiss certain Section 11
claims because plaintiff failed to plead reliance on the
35
Offering Documents. A Section 11 plaintiff must prove reliance
on the misrepresentation in
the registration statement "if the
plaintiff 'acquired the security after the issuer has made
generally available to its security holders an earning statement
covering a period of at least 12 months beginning after the
effective date of the registration statement." Pub. Emps.' Ret.
Sys. v. Merrill Lynch & Co., 277 F.R.D. 97, 112 (S.D.N.Y. 2011)
(quoting 15
u.s.c.
§ 77k(a)).
Defendants contend that Petrobras issued earning statements
that covered twelve-month periods after the effective dates of
each of the 2012 and 2013 Notes Offerings, specifically:
(1)
earning statements issued on Forms 20-F and 6-K in April 2013,
covering the twelve-month period following the February 1, 2012
effective date of the 2012 Notes Offering, and (2) earning
statements issued on Forms 20-F and 6-K in April and August 2014
covering the twelve-month period following the May 13, 2013
effective date of the 2013 Notes Offering. Defendants further
contend, and plaintiffs do not dispute,
that Union purchased
Notes after the relevant earning statements were issued.
7
Plaintiffs nonetheless fail to plead that they relied on the
The specific Notes that defendants contend were purchased after
the relevant earning statements were issued are listed on page
52, footnote 56 of Defendants' Memorandum of Law in Support of
Their Motion to Dismiss the Consolidated Amended Complaint dated
April 17, 2015, ECF No. 156.
7
36
original registration statements. Accordingly,
defendants' motion to
the Court granted
dismiss plaintiffs' Section 11 claims
based on Notes purchased after Petrobras issued the relevant
earning statements.
Fifth, defendants moved to dismiss plaintiffs' Securities
Act claims on the ground that plaintiffs failed to allege that
they purchased the relevant securities in domestic transactions.
The Securities Act applies only to securities listed on a
domestic stock exchange or purchased or sold in the United
States. See Morrison V. National Australia Bank, 561 U.S. 247,
273
(2010). The CAC fails to plead that plaintiffs purchased the
relevant securities in such domestic transactions. However,
based on plaintiffs' representations in their briefs and at oral
argument that they did,
in fact, purchase the securities in
domestic transactions, the Court granted them leave to amend.
Brazilian Law Claims. Counts III through V allege
violations of Brazilian law on behalf of class members who, in
addition to purchasing Petrobras securities in the United
States, also purchased Petrobras common or preferred shares on
the Brazilian stock exchange, known as the Bovespa. Defendants
moved to dismiss these Brazilian law claims on the ground that
they are subject to mandatory arbitration pursuant to the
Company's bylaws.
37
Article 58 of Petrobras' bylaws provides that "disputes
involving the
Corporation, its shareholders, managers and
members of the Audit Board" regarding "the rules issued -· by the
Brazilian Securities and Exchange Commission (Comissao de
Valores Mobiliarios - CVM) as well as in all further rules
applicable to the operation of the capital market in general,"
"shall be resolved according to the rules of the Market
Arbitration Chamber." Expert Report of Luiz Cantidiano dated
April 17, 2015, Cooper Deel. Ex. 27 ("Cantidiano Rep.")
~
10.
The Market Arbitration Chamber was created by the Bovespa to
serve as a specialized forum for resolution of disputes related
to corporate and securities laws. Id.
~
47.
Both parties agree that whether purchasers of Petrobras
securities on the Bovespa agreed to the mandatory arbitration
clause is a question of Brazilian law. See Schnabel v.
Trilegiant Corp., 697 F.3d 110, 119 (2d Cir. 2012). The Court is
persuaded that, under Brazilian law, Petrobras' arbitration
clause is valid and enforceable against purchasers of Petrobras
securities on the Bovespa. According to defendants
1
expert, in
2001 Brazil amended Article 109 of the Brazilian Corporate Law
("BCL")
to expressly authorize companies to include mandatory
arbitration clauses in their bylaws: "The corporation's bylaws
may establish that any disputes between the shareholders and the
corporation, or between the majority shareholders and the
38
minority shareholders may be resolved by arbitration under the
terms specified by
it.u Cantidiano Rep. ~ 20.
Around the same time, the Bovespa created the so-called
"Novo Mercado,u a special listing segment that required
companies to adopted increased corporate governance standards as
a prerequisite to eligibility, one of which was adoption of an
arbitration provision in their bylaws. Id. ,
25. Leading
Brazilian scholars have opined that shareholders manifest their
consent to such arbitration clauses by purchasing shares of the
company after the arbitration bylaw is enacted, and are
therefore bound thereby. Id. , , 28-29; Reply Report of Luiz
Cantidiano dated May 22, 2015 ("Cantidiano Reply Rep.u), Reply
Declaration of Roger A. Cooper dated May 22, 2015
("Cooper Reply
Decl.u) Ex. 5, , , 9-13.
In the wake of these changes, over 160 Brazilian companies
have adopted bylaws mandating arbitration of shareholder
disputes. Id. , 24. One such company was Petrobras, which
adopted the arbitration provision in Article 58 of its bylaws in
2002 by Board resolution and shareholder vote. Cantidiano Rep. ,
31. Petrobras disclosed the existence of this provision to
current and prospective shareholders via its annual filings with
the SEC. Id. , 32. Because the members of the putative class by
definition purchased their shares in or after 2010, they are
bound by Article 58.
39
Moreover, Article 58, by its plain terms, encompasses the
Brazilian law
claims asserted in Counts III through
v
of the
CAC, which allege violations of the CVM Regulations and other
Brazilian laws applicable to securities transactions. These
claims are "disputes ... involving the Corporation, its
shareholders,
[and] managers" arising from "the rules issued ...
by the Brazilian Securities and Exchange Commission (Comissao de
Valores Mobiliarios - CVM) as well as in all further rules
applicable to the operation of the capital market in general."
Id.
~
10. Accordingly, plaintiffs are bound to arbitrate these
claims.
Plaintiffs' arguments to the contrary are not persuasive.s
First, plaintiffs' expert argues that the Brazilian Arbitration
Act provides that a party is bound by an arbitration clause
contained in a contract of adhesion only if that party either
initiates the arbitration or expressly agrees in writing to be
bound. See Expert Report of Erica Gorga ("Gorga Rep."), Gilmore
Deel. Ex. 29, at 5. However, defendants' expert persuasively
On June 10, 2015, in a conference call with the Court,
plaintiffs' lead counsel requested permission to file a surreply
expert report to address specific issues that they claimed were
raised for the first time in defendants' reply report. The Court
granted that request based on their representation that the
proposed surreply report would be limited to the narrow issues
specified by lead counsel. The report that lead counsel filed
went far beyond those issues. See ECF No. 175-1. As a result,
plaintiffs' lead counsel burdened both the Court and defense
counsel with duplicative and unauthorized argument.
8
40
demonstrates that the weight of authority holds that the
provisions of the BAA
regarding adhesion contracts apply to
contracts of unequal bargaining power, such as consumer
contracts, and not to arbitration provisions contained in
corporate bylaws. See Cantidiano Reply Rep.,
~~
8-14. Moreover,
plaintiffs' expert's opinion would render unenforceable the
bylaws of over 160 Brazilian companies that provide for
mandatory arbitration, including all of those listed on the Novo
Mercado. Id.
~
15.
Second, plaintiffs' expert opines that an arbitration
clause must be approved unanimously at the shareholder meeting
at which it is adopted in order to bind all shareholders. Gorga
Rep. at 8. However, Article 136 the BCL provides a general rule
that "resolutions of a general meeting shall be passed by a
simple majority of votes." Cantidiano Reply Rep.
~
18 & n.30.
Articles 221 and 294 of the BCL specify certain corporate
changes that require unanimous agreement of the shareholders, of
which adoption of an arbitration clause is not one.
Id.~
17. In
addition, defendant's expert cites articles discussing whether
an arbitration clause is binding on a shareholder who voted
against it or abstained from voting, implying that an
arbitration clause adopted by non-unanimous vote is not per se
void. Id.
~
19 & n.32.
41
Earlier this year, the Brazilian National Congress approved
legislation 1 which was drafted by a commission of judges,
arbitration experts, and government officials, providing that
"[a]pproval of the addition of an arbitration agreement in the
bylaws, with due regard for the quorum set out in art. 136 [of
the BCL], binds all shareholders." See Cantidiano Reply Rep.
~
22 & App'x J. This provision is consistent with the prevailing
view among Brazilian legal scholars, as described by defendants'
expert, that arbitration bylaws are valid if approved by a
simple majority, are not considered contracts of adhesion, and
are binding on all shareholders. Thus, the adoption of this
provision provides further support for the Court's conclusion
that Article 58 is valid and binding under Brazilian law.
Third, plaintiffs' expert argues that Article 58 was not
validly adopted because the meeting agenda published in advance
of the shareholders' meeting did not provide adequate notice of
the proposed amendment. Gorga Rep. at 16-17. Article 124 of the
BCL provides that the notice of the shareholder meeting "shall
contain the agenda, and, in the case of an amendment to the
bylaws, an indication of the subject-matter." Id. However, the
agenda for the March 22, 2002 shareholders' meeting, at which
Article 58 was approved, notified shareholders that a vote would
be held on the reform of the Company's bylaws to promote
"changes to enhance corporative governance practices and to move
42
toward fulfillment of requirements for listing in Level 2 of the
Sao Paulo Stock Exchange - BOVESPA." Cantidiano Reply Rep.
~ 30
& App'x K. The requirements for such listing, in turn, included
adoption of an arbitration bylaw. Thus, this notice was
sufficient under Brazilian law. See id.
~
32 (quoting CVM
Opinion that notice is valid so long as subject matter of the
decided issue "is virtually or implicitly contained in" the
agenda) .
Finally, defendants argue that plaintiffs who purchased
Petrobras securities both pursuant to U.S. transactions and on
the Bovespa must also arbitrate their Exchange Act claims. By
purchasing Petrobras shares on the Bovespa, they argue, this
subset of the class agreed to the arbitration provision of the
Company's bylaws. That provision encompasses all claims arising
from "rules applicable to the operation of the capital market in
general," which, defendants argue, includes the U.S. federal
securities laws.
However,
it is a bedrock principle that "a party cannot be
required to submit to arbitration any dispute which he has not
agreed so to submit." AT&T Technologies, Inc. v. Communications
Workers of America, 475 U.S. 643, 648
(1986).
"[A]s with any
other contract, the parties' intentions control." Cohen v. UBS
Fin. Servs., Inc., No. 14-781-CV, 2015 WL 3953348, at *2 (2d
Cir. June 30, 2015). As discussed above, as a matter of
43
Brazilian law, purchasing Petrobras shares on the Bovespa
indicates the purchaser's consent to be bound by the arbitration
clause in the company's bylaws. But nothing about such share
purchases indicates that the purchaser consents to arbitrate
different claims relating to different securities purchased in
different transactions in another country (the United States) .
Accordingly, the Court finds that there is no valid arbitration
agreement with respect to the Exchange Act claims.
Accordingly, in its Order of July 9, 2015, the Court
granted defendants' motion to dismiss Counts III through V on
the basis of the mandatory arbitration provision of the
Company's bylaws, but denied defendants' motion to dismiss the
Exchange Act Claims pursuant to that provision.
For the foregoing reasons, the Court, by Order dated July
9, 2015, granted in part and denied in part defendants' motion
to dismiss.
Dated:
J~/t4S.D.J.
New York, NY
July 30, 2015
44
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