DoubleLine Capital LP et al v. Odebrecht Finance, Ltd et al
Filing
81
MEMORANDUM OPINION AND ORDER re: 75 MOTION to Dismiss the Third Amended Complaint: For the reasons articulated above, Defendants's motion to dismiss is GRANTED IN PART and DENIED IN PART. Plaintiffs state claims under Section 10(b) and Rule 10b-5 against CNO based on CNO's GAAP violations; opinion statements regarding its financial strengths, ability to manage political risk, and reason for CNO's success in Venezuela and competitiveness in Brazil; and disclosures in the 4.375% Notes about CNO's overall main competitive strengths. Plaintiffs also state Section 10(b) and Rule 10b-5 claims again OEC under successor liability to the extent that Plaintiffs stated those claims against CNO. Plaintiffs state a Section 20(a) claim against OSA. Plaintiffs' other Section 10(b) and Rule 10b-5 claims against CNO, OEC, and OSA are dismissed without prejudice. Plaintiffs state a claim for fraud against CNO and OEC. Plaintiffs state a claim for negligent mis representation claim against CNO, OEC, and OSA. Plaintiffs' conspiracy claim against CNO, OEC, and OSA is dismissed without prejudice. Plaintiffs' Debtor and Creditor Law § 276 claim against CNO, OEC, and OSA is dismissed without preju dice. Plaintiffs are granted leave to replead those claims that have been dismissed without prejudice no later than thirty (30) days following the date of this order. See Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir. 2008) (noting that leave to amend is "liberally granted"). The Clerk of Court is directed to terminate the motion pending at Dkt. No. 75. (Signed by Judge Gregory H. Woods on 9/22/2019) (jwh) Modified on 9/23/2019 (jwh).
Case 1:17-cv-04576-GHW Document 81 Filed 09/23/19 Page 1 of 42
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
UNITED STATES DISTRICT COURT
DOC #: _________________
SOUTHERN DISTRICT OF NEW YORK
DATE FILED: 9/23/2019
------------------------------------------------------------------X
DOUBLELINE CAPITAL LP, DOUBLELINE :
INCOME SOLUTIONS FUND, and
:
DOUBLELINE FUNDS TRUST (on behalf of its: :
1) DoubleLine Core fixed Income Fund Series; 2) :
1:17-cv-4576-GHW
DoubleLine Emerging Markets Fixed Income Fund :
Series; and 3) DoubleLine Shiller Enhanced Cape® :
MEMORANDUM OPINION
Series),
:
AND ORDER
:
Plaintiffs, :
:
-against:
:
CONSTRUTORA NORBERTO ODEBRECHT, :
S.A., ODEBRECHT ENGENHARIA E
:
CONSTRUÇÃO S.A., and ODEBRECHT, S.A.
:
:
Defendants. :
-------------------------------------------------------------------X
GREGORY H. WOODS, United States District Judge:
After Defendants Construtora Norberto Odebrecht (“CNO”), Odebrecht Engenharia e
Construção S.A. (“OEC”), and Odebrecht, S.A. (“OSA”) joined the ranks of the many other
Brazilian construction and engineering conglomerates accused of bribing government officials to
secure lucrative contracts, Plaintiffs, substantial purchasers of Notes issued by Odebrecht Finance
Ltd. (“Odebrecht Finance”) and guaranteed by CNO and OEC, saw the value of their holdings drop
precipitously. Plaintiffs sued, asserting claims under Section 10(b) and 20(a) of the Exchange Act, as
well as various state law claims. This Court dismissed many of Plaintiffs’ claims on Defendants’
motion, and permitted Plaintiffs an opportunity to replead those dismissed without prejudice.
Because Plaintiffs remedied most of the failures of their second amended complaint—including
adequately pleading the concealment of CNO’s involvement in the bribery scheme and the
materialization of that risk when auditors refused to certify CNO’s financial reports—many of its
claims survive Defendants’ motion to dismiss.
Case 1:17-cv-04576-GHW Document 81 Filed 09/23/19 Page 2 of 42
I.
BACKGROUND
The Court assumes familiarity with the facts and procedural posture of this case as broadly
outlined in DoubleLine Capital LP v. Odebrecht Fin., Ltd., 323 F. Supp. 3d 393 (S.D.N.Y. 2018) (the
“August 2018 Opinion”). There, the Court partially granted and partially denied Defendants’
motion to dismiss, granting Plaintiffs permission to replead all claims denied without prejudice.
Plaintiffs then filed a third amended complaint (“TAC”), alleging new claims and supplementing the
record accordingly. Dkt. No. 61. Defendants, however, again moved to dismiss. Defs.’ Mem. in
Supp. Mot. to Dismiss, Dkt. No. 77 (“MTD”).
Many of the facts asserted in the third amended complaint are substantially identical to those
asserted in the prior version of the complaint. In response to the Court’s August 2018 Opinion,
Plaintiffs have bolstered a number of allegations. The principal categories of those expanded
allegations are described below. Some of the new facts alleged in the third amended complaint
indicate that CNO violated Brazilian generally accepted accounting principles (“GAAP”). Others
support claims that statements in the Notes issued by Odebrecht Finance were false. Still more
advance Plaintiffs’ claims for compensation for CNO’s alleged federal and state law violations from
both OEC—under New York’s successor liability law—and OSA—as a control person and a coconspirator. The Court addresses each in turn.
A. CNO’s GAAP Violations
Plaintiffs allege that many of Defendants’ public statements were false or misleading as a
result of their undisclosed participation in the massive bribery scheme that entangled many Brazilian
corporations and politicians. Among those statements are CNO’s quarterly and annual financial
statements. In the offering memoranda for the 7.50%, 7.125%, 4.375%, and 5.250% Notes, CNO
asserted that it had prepared its financial statements in accordance with Brazilian GAAP. TAC
¶¶ 122-124, 141-43, 158-160, 179-181. According to Plaintiffs, the controlling GAAP regulations
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are those issued by the Brazilian Accounting Pronouncements Committee (Comitê de Pronunciamentos
Contábeis), which promulgates accounting standards using the prefix “CPC,” and the International
Financial Reporting Standards (“IFRS”), which promulgates the International Accounting Standards
(“IAS”). TAC ¶¶ 93 n.12, 95. According to Plaintiffs, CNO’s statements were false and misleading
because they did not, in fact, comply with Brazilian GAAP requirements in three ways. TAC ¶ 95.
First, Plaintiffs allege that the 2009 through 2015 financial statements failed to disclose the
bribery scheme and any expected financial costs of the bribery scheme as contingent liabilities. The
provisions of Brazilian GAAP that address the reporting and disclosure of contingent liabilities are
CPC 25—or the substantially similar IAS 37. TAC ¶ 97. According to IAS 37, contingent liabilities
are possible obligations whose existence will be confirmed by uncertain future events that are not
wholly within the control of the entity. TAC ¶ 98. Those standards, Plaintiff alleges, demand that a
contingent liability “more likely than not” to result in a loss—namely, slightly more than fifty
percent likely—be footnoted. TAC ¶ 99.
The bribery and kickback scheme presented substantial risk to CNO. If exposed, Plaintiffs
claim, the company faced many foreseeable consequences, including downgrades by ratings agencies,
deteriorating liquidity, regulatory investigations and actions leading to massive fines or penalties,
criminal prosecution, and increased auditor scrutiny precluding CNO from timely filing required
financial statements. Any of those events would result in losses. TAC ¶ 100.
The volume of bribes increased by an order of magnitude between 2006 and 2014. TAC
¶ 101. In 2006, OSA created a Division of Structured Operations to manage the bribery scheme.
TAC ¶¶ 63-64. As early as 2009, the head of that division warned OSA’s Chief Executive Officer,
Marcelo Odebrecht, that the escalating level of bribes constituted “financial suicide” and posed
extreme risk to the company. TAC ¶ 102. By 2014, Marcelo Odebrecht had instructed the Division
of Structured Operations to flee Brazil to evade Brazilian investigators, and Defendant OSA was
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assisting Division members in acquiring visas and paid their relocation expenses. TAC ¶¶ 84-85.
Plaintiff alleges that these facts demonstrate that the potential legal troubles and financial loss was
certainly more likely than not, and should have been disclosed in CNO’s financial statement
footnotes. TAC ¶ 103.
Second, Plaintiffs assert that CNO violated CPC 00 when it failed to separately disclose the
amount of revenue it obtained through its use of bribes. TAC ¶ 105. CPC 00 (Conceptual Structure for
the Preparation and Presentation of the Financial Statements) explains that the common practice is to
separately disclose different types of revenue “to assist investors in assessing the ability of a business
to generate cash in the future and distinguish revenues that arise in the normal course of the entity’s
business from revenues stemming from contingent activities that may not be repeated on a regular
basis.” TAC ¶ 106. Plaintiffs allege that investors and others would not necessarily have expected
contract revenue obtained by fraud to be a reliable indicator of future revenue. TAC ¶ 109.
Third, CNO’s failure to report bribes as costs to obtain its reported revenue, according to
Plaintiffs, violated IAS 11. TAC ¶¶ 110-17. Specifically, Plaintiffs argue that CNO should have
reported the bribes used to secure a specific contract as “contracting costs” incurred the year that
the bribe was paid. TAC ¶¶ 111-13. The third amended complaint highlights several of those bribes
Plaintiffs paid out to officials in the hope of receiving awards for various contracting projects,
including $23 million paid to a director at Petrobras in 2010 to obtain the construction contract for
Brazil’s Abreu e Lima Refinery. TAC ¶ 75.
B. Offering Memoranda Statements
In addition to those already alleged in their second amended complaint and previously
identified in the August 2018 Opinion, Plaintiffs assert several more statements that CNO made in
the Odebrecht Finance Notes’ offering memoranda about the company that were false and
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misleading. These statements span everything from a discussion of CNO’s financial strength, to its
dexterity in avoiding political risk, and its compliance with local regulations.
Plaintiffs argue that the offering memoranda made false and misleading statements when
discussing CNO’s success in navigating political risk without mentioning that its principal strategy
was bribing officials to the tune of more than $3.3 billion. See TAC ¶¶ 132, 151 168, 189.
Ultimately, these statements in the offering memoranda concealed the existence of the bribery
scheme and its attendant risks. The applicable language follows:
Managing Political Risk
We have operated for more than two decades in many countries that have significant levels
of political risk. We are currently active in numerous countries, including Angola, Argentina,
Brazil, Colombia, the Dominican Republic, Libya, Mozambique, Panama, Peru, Portugal, the
United States and Venezuela. We attribute our success in certain countries with significant
levels of political risk to the following competitive strengths:
***
We attempt to mitigate political risk through our experience and knowledge of the markets
in which we are active and by entering into joint ventures with local companies and using
local subcontractors, suppliers and labor. By establishing these partnerships with local
entities, we also seek to integrate our operations into the communities in which we operate.
We generally seek to establish long-term operations in countries in which we are active and
seek appropriate project opportunities that meet our rigorous risk management criteria. Our
long presence in countries such as Peru (34 years), Angola (29 years), and Venezuela (19
years), including during periods of social unrest or war, and our involvement in high visibility
projects that are important to a country’s economy and development, have earned us
goodwill with the governments of these countries. Accordingly, while other construction
companies generally avoid operating in certain of the countries in which we are active, our
management believes that our extensive experience in these countries, our diversification
and our extensive contract risk assessment and risk sharing with other project participants
allow us to effectively manage the political risks presented by construction projects in these
countries.
TAC ¶ 167 (omissions in original); see also TAC ¶¶ 131, 150, 188.
Plaintiffs also assert that the statements about CNO’s adherence to local regulations were
false and misleading. All of the offering memoranda (except those for the 5.250% Notes)
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incorporated the statements excerpted below, which, according to Plaintiffs, omit the material fact
that CNO’s bribes violated local regulations. See TAC ¶¶ 134, 153, 170.
Regulatory
The construction sector in Brazil is not regulated by a particular federal or state agency. We
must register each contract on which we commence work with the applicable Regional
Council of Engineering and Architecture (Conselho Regional de Engenharia e Arquitetura).
In addition, we are required to obtain all necessary licenses (excluding environmental
licenses, which are generally obtained by the project owner) related to each project that we
perform in Brazil as a condition of pre-qualification. In relation to work performed outside
Brazil, we are obliged to comply with all applicable regulations imposed on the local and
state level and to obtain all necessary permits
TAC ¶¶ 133, 152, 169.
Finally, the third amended complaint reiterated the claim that CNO’s offering memoranda
made false and misleading disclosures about the reason for the company’s financial strength and
liquidity. TAC ¶¶ 126, 145, 162, 183; see August 2018 Op. at 412, 414.
Financial Strength
We believe that our financial performance has been consistent, enabling us to rely primarily
on our cash flow from operations to invest in our business. Our EBITDA margins (which
we define as EBITDA as a percentage of our net service revenues) for the three-month
periods ended March 31, 2012 and 2011 were 10.2% and 9.9%, respectively, and for the
years ended December 31, 2011 and 2010 were 10.7% and 11.1%, respectively. The sum of
our cash and cash equivalents and financial investments totaled R $5,006.0 million (U.S.
$2,747.4 million) at March 31, 2012, compared to R $6,831.1 million (U.S. $3,749.0 million)
and R $4,717.1 million (U.S. $2,588.8 million) at December 31, 2011 and 2010, respectively.
We are focused on maintaining a relatively strong financial position and liquidity we have as
compared to many of our competitors.
TAC ¶¶ 144; see also TAC ¶¶ 125, 161, 182.
C. Materially False and Misleading Statements About CNO’s Credit Ratings
In CNO’s 2012 Earnings Release, the company disclosed the investment grade credit ratings
that each of the three major rating agencies had awarded CNO.
On May 23, 2012, Standard & Poor’s raised CNO’s Global and National ratings to
investment grade, at BBB- and brAAA respectively. With this upgrade, CNO achieve the
triple-investment grade, across the three main rating agencies.
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TAC ¶ 195. Because the release failed to disclose that these ratings were achieved only by
concealing the bribery and kickback scheme from the rating agencies, Plaintiffs allege, the statements
touting CNO’s consecutive upgrades were false and misleading. TAC ¶ 196.
The notes to CNO’s first quarter 2013 financial statements similarly described CNO’s
success in achieving strong credit ratings.
The Company’s credit has been monitored and analyzed by the main credit rating agencies
for many years and, since its first rating, the Company has obtained consecutive upgrades on
both the local and global scales.
In December 2009, the rating agency Moody’s started to cover the Company, and assigned a
Baa3 investment grade rating on the global scale and Aa1.br on the Brazilian national scale.
In October 2010, the rating agency Fitch Ratings assigned a BBB- investment grade rating
on the global scale and AA+ on the Brazilian national scale.
In June 2011, the rating agency Standard & Poor’s assigned a BB+ rating on the global scale
and br AA+ on the national scale.
TAC ¶ 198. And in CNO’s third and fourth quarters, the financial statements portrayed an even
rosier picture of CNO’s successful credit ratings history.
The Company’s credit has been monitored and analyzed by the main credit rating agencies
for many years and, since its first rating, the Company has obtained consecutive upgrades on
both the local and global scales.
In December 2009, the rating agency Moody’s started to cover the Company, and assigned a
Baa3 investment grade rating on the global scale and an Aa1.br rating on the Brazilian
national scale. In May 2012, the rating agency Standard & Poor’s assigned a BBB- rating on
the global scale and a br AAA rating on the national scale. In September 2013, the rating
agency Fitch Ratings upgraded the Company’s rating to BBB on the global scale and AAA
on the Brazilian national scale.
TAC ¶¶ 202, 206. CNO continued discussing its credit ratings in similar language in all its 2014
earnings releases. TAC ¶¶ 210, 213, 217. These pronouncements were false and misleading,
according to Plaintiffs, because they obscured the fact that those ratings were achievable only
because credit rating agencies were unaware of Defendants’ involvement in the bribery scheme.
TAC ¶¶ 203, 207.
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D. OSA’s Materially False and Misleading Statements
Plaintiff alleges that OSA falsely characterized its company as one based on a foundation of
public service, and committed to following a strict code of conduct that effectively prohibited
engaging in bribery. In its 2014 Annual Report, Odebrecht asserted:
For 70 years, the ethos of service has been the decisive hallmark that sets the Odebrecht
Group apart. It is impossible to translate that ethos into words, but it can be easily identified
in the conduct of people who are always willing to perceive, understand, and meet the needs
of others, whether they are a client, a co-worker or anyone linked to their work or personal
lives.
Identifying and bringing in people endowed with that constant and steadfast desire to serve
others has been Odebrecht’s main drive for seven decades. Thanks to them, things became
simple, and everything else ensures naturally: the client’s satisfaction, support for national
development, the generation of social wealth, and the Group’s survival, growth, and
perpetuity.
Odebrecht’s history is the story of people with the ethos of service. People who apply it on
a daily basis, no matter what. It is in their blood, so for them, any time is a good time for
serving others. For them, service is an ongoing commitment.
***
Code of Conduct
The Odebrecht Group’s Code of Conduct contains concepts and guidelines in addition to
TEO that reflect developments in global legislation. Therefore, it is a Group policy that
must be adhered to in a disciplined manner by all Odebrecht Members. It particularly guides
their external relations, as well as applying to the entire value chain in all of the Businesses,
geographic regions and societies in which we are present.
TAC ¶¶ 219-20. Additionally, Plaintiffs note that Odebrecht’s code of conduct, featured on its
website, specifically prohibited employees from bribing public officials. See TAC ¶¶ 221-222. These
statements were materially false and misleading, according to Plaintiffs, because OSA and its senior
management were all aware of the company’s involvement in the bribery scheme. TAC ¶ 223.
Plaintiffs also take issue with OSA’s statements about its dedication to reliable and
transparent accounting processes and the requirement that OSA members respect the rule of law,
citing to the following provisions in the company’s code of conduct on its website:
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Accounting Records
The reliability and transparency of the accounting practiced by the Companies at the
Organization are considered crucial.
Commonly accepted legislation, standards and accounting principles should be rigorously
observed in order to guarantee consistent records and reports that will permit the disclosure
and evaluation of the Company’s operations and results.
***
Respect for Laws
In their business actions, the Organization’s Team Members should respect and obey the
laws and regulations of each country or region in which they operate.
TAC ¶¶ 224, 226. The Plaintiffs assert that these statements are materially false and misleading
because OSA had established a shadow accounting system designed to hide the bribes from CNO’s
financial records, and team members clearly were not obeying the law when bribing officials for
favorable contracts. TAC ¶¶ 224-27.
II.
LEGAL STANDARD
For a complaint to survive a motion to dismiss under Federal Rule of Civil Procedure
12(b)(6), it “must allege sufficient facts, taken as true, to state a plausible claim for relief.” Johnson v.
Priceline.com, Inc., 711 F.3d 271, 275 (2d Cir. 2013) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 55556 (2007)). Courts follow a “two-pronged approach” in determining plausibility. Ashcroft v. Iqbal,
556 U.S. 662, 679 (2009). “First, although a court must accept as true all of the allegations contained
in a complaint, that tenet is inapplicable to legal conclusions, and threadbare recitals of the elements
of a cause of action, supported by mere conclusory statements, do not suffice.” Harris v. Mills, 572
F.3d 66, 72 (2d Cir. 2009) (brackets and internal quotation marks omitted) (quoting Iqbal, 556 U.S. at
678). Second, a court determines “whether the ‘well-pleaded factual allegations,’ assumed to be true,
‘plausibly give rise to an entitlement to relief.’” Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir. 2010)
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(quoting Iqbal, 556 U.S. at 679). This analysis is a “context-specific task that requires the reviewing
court to draw on its judicial experience and common sense.” Iqbal, 556 U.S. at 679.
In the securities context, a court may consider not only the complaint itself, but also “any
written instrument attached to the complaint, statements or documents incorporated into the
complaint by reference, legally required public disclosure documents filed with the SEC, and
documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.”
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007).
Securities fraud claims are also subject to the heightened pleading requirements of Federal
Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). Rule 9(b)
requires that “in alleging fraud or mistake, a party must state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b). To satisfy this requirement, the complaint must
“(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.” ATSI, 493 F.3d at 99. “Allegations that are conclusory or unsupported by factual
assertions are insufficient.” Id. Furthermore, under the PSLRA, securities fraud plaintiffs alleging
an untrue statement of material fact or an omission of a material fact necessary to make statements
not misleading must specify each statement alleged to have been misleading, the reason or reasons
why the statement is misleading, and, if an allegation regarding the statement or omission is made on
information and belief, the complaint shall state with particularity all facts on which that belief is
formed. 15 U.S.C. § 78u-4(b)(1). A plaintiff must therefore “do more than say that the statements .
. . were false and misleading; [she] must demonstrate with specificity why and how that is so.”
Rombach v. Chang, 355 F.3d 164, 174 (2d Cir. 2004).
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III.
DISCUSSION
A. Federal Securities Fraud Claims
Plaintiffs allege that Defendants violated Section 10(b) of the Exchange Act. The Securities
and Exchange Commission (“SEC”) rule implementing that section makes it unlawful to “make any
untrue statement of a material fact or to omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not misleading.” 17
C.F.R. § 240.10b–5(b); see also 15 U.S.C. § 78j(b). To succeed on a Section 10(b) claim, a plaintiff
must therefore show (1) a material misrepresentation or omission, (2) scienter, (3) a connection with
the purchase or sale of a security, (4) reliance, (5) economic loss, and (6) loss causation. Kleinman v.
Elan Corp., plc, 706 F.3d 145, 152 (2d Cir. 2013) (citing Dura Pharm. v. Broudo, 544 U.S. 336, 341-42,
(2005)). Defendants challenge both the materiality of many of the statements identified by Plaintiffs
and assert that Plaintiffs have not adequately pleaded loss causation.
Section 20(a) of the Securities Exchange Act provides that “ [e]very person who, directly or
indirectly, controls any person liable under any provision of this chapter or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the same extent as such controlled
person to any person to whom such controlled person is liable . . . unless the controlling person
acted in good faith and did not directly or indirectly induce the act or acts constituting the violation
or cause of action.” 15 U.S.C. § 78t. “Any claim for ‘control person’ liability under § 20(a) of the
Exchange Act must be predicated on a primary violation of securities law.” Pacific Inv. Mgmt. Co.
LLC v. Mayer Brown LLP, 603 F.3d 144, 160 (2d Cir. 2010). “To state a claim of control person
liability under § 20(a), ‘a plaintiff must show (1) a primary violation by the controlled person, (2)
control of the primary violator by the defendant, and (3) that the defendant was, in some meaningful
sense, a culpable participant in the controlled person’s fraud.’” Carpenters Pension Tr. Fund of St. Louis
v. Barclays PLC, 750 F.3d 227, 236 (2d Cir. 2014) (quoting ATSI, 493 F.3d at 108).
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1. CNO’s Actionable Statements & Omissions
Where a company does not have an obligation to speak but chooses to do so anyway, it
assumes “a duty to be both accurate and complete.” Caiola v. Citibank, N.A., N.Y., 295 F.3d 312,
331 (2d Cir. 2002); see also In re Morgan Stanley Info. Fund Sec. Litig., 592 F.3d 347, 366 (2d Cir. 2010)
(explaining that once a corporation makes “a disclosure about a particular topic, whether voluntary
or required, the representation must be complete and accurate” (quotation omitted)). Ultimately,
companies “can control what they have to disclose under [Section 10(b) and Rule 10b-5] by
controlling what they say to the market.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 45 (2011).
Courts employ this principle to triangulate when disclosure is required. For example, where
a corporation’s illegal conduct and misleading statements are connected “beyond the simple fact that
a criminal conviction would have an adverse impact upon the corporation’s operations in general or
the bottom line,” the corporation may be compelled to disclosed uncharged wrongdoing if its
statements otherwise are or will become materially misleading. Menaldi v. Och-Ziff Capital Mgmt. Grp.
LLC, 164 F. Supp. 3d 568, 581 (S.D.N.Y. 2016), reconsideration denied, 2016 WL 2642223 (S.D.N.Y.
May 6, 2016) (quotation omitted). This includes situations “when a corporation puts the reasons for
its success at issue, but fails to disclose that a material source of its success is the use of improper or
illegal business practices.” Id. (quotation omitted). On the other hand, the disclosure of a
company’s violations of its internal code of conduct is generally not required unless its absence
renders any particular statement false or misleading. See In re Pfizer Inc. S’holder Derivative Litig., 722 F.
Supp. 2d 453, 463-65 (S.D.N.Y. 2010). Key here is the presence of a prior statement that otherwise
is or will become materially misleading—without one, a corporation need not affirmatively disclose
“uncharged, unadjudicated wrongdoing.” City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG,
752 F.3d 173, 184 (2d Cir. 2014) (quotation omitted).
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“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.” IBEW Local Union No. 58 Pension
Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015)
(citation and internal quotation marks omitted). In other words, for a misstatement to be material,
there must be “a substantial likelihood that the disclosure of the omitted fact would have been
viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made
available.” Matrixx, 563 U.S. at 38 (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)); accord
ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 197 (2d Cir.
2009). A complaint “may not properly be dismissed . . . on the ground that the alleged
misstatements or omissions are not material unless they are so obviously unimportant to a
reasonable investor that reasonable minds could not differ on the question of their importance.”
ECA, 553 F.3d at 197 (omission in original) (quoting Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir.
1985)). This is because the determination of whether a false or misleading statement or omission is
material requires courts to “engage in a fact-specific inquiry” that “depends on all relevant
circumstances” and because “materiality is a mixed question of law and fact.” Id. (citations omitted);
see also TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976) (stating that the determination 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”).
Plaintiffs allege that numerous statements in CNO’s offering memoranda were materially
false or made misleading because of their omission of information regarding the ongoing bribery
scheme. Defendants challenge three groups of those allegations, namely that: (a) financial
statements violated Brazilian GAAP; (b) statements in the offering memoranda misrepresented
CNO’s financial success, management of political risk, and compliance with local regulations; and (c)
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misleading statements about CNO’s credit ratings required disclosure of the bribery scheme. The
Court addresses each in turn.
a. GAAP Violations
SEC regulations dictate that where financial statements are not prepared in compliance with
GAAP, they are presumed to be misleading. 17 C.F.R. § 210.4–01(a)(1); see also Indiana Pub. Ret. Sys.
v. SAIC, Inc., 818 F.3d 85, 93 (2d Cir. 2016).1 CNO’s offering memoranda for the 7.125% and
7.50% Notes stated that its financial statements were prepared “in accordance with accounting
practices adopted in Brazil, or Brazilian GAAP.” TAC ¶ 94. These statements, Plaintiffs allege, are
false and misleading because CNO’s financial statements violated Brazilian GAAP in three ways:
first, CNO violated CPC 25 by failing to disclose the bribery scheme and any expected financial
costs of the bribery scheme as contingent liabilities in the notes to its financial statements; second,
CNO violated CPC 00 when it failed to separately disclose the amount of revenue it obtained
through use of bribes; and third, CNO violated CPC 00 and CPC 17 when it failed to report the
bribes as costs to obtain the reported revenues.
Contingent liabilities under CPC 25: Plaintiffs assert that the TAC identified actionable
omissions in CNO’s financial reports. Specifically, Plaintiffs claim that Defendant CNO’s financial
statements breached Brazilian GAAP standards by failing to disclose the nature and range of
contingent losses attributable to the bribery scheme. TAC ¶¶ 97-104. According to Plaintiffs, CPC
25 and IAS 37 requires the accrual of expenses related to a contingent liability if the loss is
“probable” and can be reasonably estimated. TAC ¶ 98. If the contingency is simply “more likely
“[A]llegations of GAAP violations or accounting irregularities, standing alone, are insufficient to state a
securities fraud claim. Only where such allegations are coupled with evidence of corresponding fraudulent
intent might they be sufficient.” Indiana Pub Ret. Sys., 818 F.3d at 93 (internal quotation marks and citations
omitted). Because Defendants have challenged only materiality of the statements identified by Plaintiffs and
assert that Plaintiffs have not adequately pleaded loss causation, the Court need not address any issues
involving scienter.
1
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than not” (slightly more than 50%, according to Plaintiffs) to result in a loss, the contingency must
be disclosed in a footnote. TAC ¶¶ 98, 103.
The August 2018 Opinion dismissed these allegations for failing to plead facts sufficient to
demonstrate that a such a loss was more than a remote possibility during the periods reported in the
November 2011 and July 2012 offering memoranda. The TAC remedies this deficiency. It pleads
that the amount of money paid in bribes increased sharply in the four years leading up to 2009, and
remained high for the following five years. In 2006, CNO paid out $60 million in bribes. In 2007,
they paid $80 million. In 2008, $120 million. By 2009, CNO paid $260 million in bribes. From
2010 through 2014, it paid $420 million, $520 million, $730 million, $730 million, and $450 million
respectively. Such a “dramatically escalating scheme,” Plaintiffs allege, could not indefinitely “evade
the notice of regulators” and was “‘more likely than not’ to be exposed.” TAC ¶ 102. Even OSA’s
head of Structured Operations seemed aware of the risk, warning Marcelo Odebrecht that by 2009
the bribes were “financial suicide” and posed extreme risk to the company. TAC ¶ 102. By 2014,
CEO Odebrecht was even asking members of the Structured Operations team to flee Brazil to avoid
investigation. TAC ¶¶ 84, 102.
Relying on this Court’s prior opinion, Defendants contend that Plaintiffs’ complaint still fails
to proffer facts supporting the contention that an increasing amount of money paid out in bribes
make it any more likely that discovery of the bribery scheme was more than remote. MTD at 13.
Further, Defendants challenge the head of Structured Operations’ reported warnings to Marcelo
Odebrecht as articulating generic worries “presumably shared by most undiscovered criminals”
rather than concrete facts demonstrating any likelihood of detection. Id. at 13. Defendants also
stress that Marcelo Odebrecht’s warning to Structured Operation employees to flee the country is
not a fact suggesting that Brazilian authorities were investigating the Odebrecht entities. Id.
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Defendants overstate Plaintiffs’ burden here. Plaintiffs did not need to plead that the
investigation was likely to have revealed the scheme between 2009 and March 2012. Rather,
Plaintiffs needed to allege facts sufficient to show that although the company believed exposure
“more likely than not,” CNO still failed to disclose the liability per GAAP. Given these newly
alleged facts, Plaintiffs adequately demonstrate that company officials thought the possibility of
detection was more than remote by 2009, triggering their obligation to footnote the liability in any of
the covered reporting periods.
Failing to identify illegally obtained contract revenue: Plaintiffs assert that CNO
violated CPC 00 and Brazilian GAAP in its financial reports by failing to distinguish revenues
generated in the normal course of the company’s business from those derived from contingent
activities that may not be recurring.2 TAC ¶¶ 105-09. In its prior opinion, this Court found that
Plaintiffs failed to identify which, if any, revenue derived from unlawfully obtained contracts should
have been reported separately on CNO’s financial disclosures. August 2018 Op. 446-47. In the
TAC, Plaintiffs clarified that CNO obtained all of the Petrobras contracts through bribery, and listed
CNO’s yearly revenue from those contracts between 2009 and 2013. TAC ¶ 107.3
Defendants argue that Plaintiffs fail to particularly allege when the revenue should have been
recognized or disclosed, and therefore which financial statements violate GAAP. This is incorrect—
The Court notes that Plaintiffs’ description of CPC 00 suggests that distinguishing between normal revenue
streams and revenue derived from contingent activities is a “common practice”—permissive, not mandatory.
TAC ¶ 106. Because Defendants did not challenge Plaintiffs’ characterization of CPC 00, the Court assumes,
without deciding, that violating CPC 00 constitutes a violation of Brazilian GAAP.
3 Defendants seem to read the third amended complaint—particularly the list of bribes in Paragraph 75—as
Plaintiffs “not plead[ing] that every single Petrobras contract was obtained illicitly.” MTD at 15-16. The
Court does not agree with this interpretation. Plaintiffs clearly allege that all of CNO’s Petrobras contracts
were obtained illegally. See TAC ¶ 107. To the extent that Defendants’ interpretation is premised on reading
Paragraph 75 as comprising all the illicitly obtained contracts, the Court notes that the list in Paragraph 75 is
preceded by a statement that it “include[s]” the following projects, not that the list represents all bribes made.
TAC ¶ 75 (emphasis added). Further, adding the dollar amounts spent on bribes as listed in Paragraph 75
yields only about a third of the alleged total of $3.3 billion.
2
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in the chart underneath Paragraph 107 in the third amended complaint, Plaintiffs clearly indicate the
five years in which the contract yielded revenue that ought to have been separately reported in
CNO’s financial disclosures. This is more than adequate to meet their pleading burden.
Failing to properly report bribes as contract expenses: Paragraph 21 of IAS 11 requires
the recognition of costs incurred in securing a contract if those costs can be separately identified and
measured reliably, and if it is probable that the contract will be obtained. Previously, the Court
found this GAAP violation to have been insufficiently pleaded because Plaintiffs provided only an
aggregate amount of bribe payments made between 2001 and 2016. August 2018 Op. at 447. In
contrast, the third amended complaint identifies at least one $23 million payment in 2010 that CNO
made in 2010 to a specific individual to secure a construction contract for Brazil’s Abreu e Lima
Refinery. See TAC ¶ 75.
Defendants argue that a separate provision of IAS 11 governs these types of costs, and that
CNO need not have reported them at all because they are not properly cognizable as a contracting
expense. To the extent that Defendants’ concerns raise questions answerable only with the help of
expert testimony about Brazilian accounting procedures, they are more appropriately reserved for
summary judgment. As it stands, Plaintiffs have met their burden under Rule 9(b) to particularly
allege a violation.
b. Financial Success and Regulatory Compliance
Among other things, Plaintiffs allege that CNO misrepresented its financial success and
prospects by failing to disclose the bribery scheme. TAC ¶ 120.
Financial strength: In the Notes’ offering memoranda under a section labelled “Financial
Strength,” CNO alleged that its “EBITDA margins (which we define as EBITDA as a percentage of
our net service revenues) for the six-month period ended June 30, 2010, 2009, 2008, and 2007 were
10.8%, 9.7%, 14.0%, and 10.3%, respectively. Our cash and cash equivalents and financial
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investments totaled R $2,513.9 million (U.S. $1,395.4 million) and R $3,135.0 million (U.S. $1,740.2
million) as of June 30, 2010 and as of December 31, 2009, respectively.” TAC ¶ 125; see also August
2018 Op. at 412; TAC ¶¶ 144, 161, 182. The success of this argument rises and falls along with
Plaintiffs’ allegations that CNO violated Brazilian GAAP: If CNO violated GAAP in failing to
account for the cost of the bribery scheme, it may have similarly misreported its earnings, and,
therefore, its earnings before interest, taxes, depreciation, and amortization, or “EBITDA.”
Defendants repeat their contentions that because Plaintiffs failed to sufficiently plead that
CNO violated GAAP, the offering memoranda’s explanations for CNO’s financial strength could
not be material misstatements. This Court has concluded otherwise, and therefore also finds that
Plaintiffs successfully pleaded that CNO made material misstatements in the “Financial Strength”
section of the offering memoranda.
Political risk: Plaintiffs allege that the offering memoranda’s descriptions of how CNO
manages “political risk” are material misstatements because it obscures the fact that CNO’s primary
tool in managing political risk was spending more than $3.3 billion in illicit bribes and kickbacks.
See, e.g., TAC ¶ 132. Defendants assert that Plaintiffs have failed to clarify the meaning of “political
risk,” and therefore fail to plead with particularity that the statement is false. MTD at 19. Further,
Defendants argue that because CNO’s foreign operations pre-date the alleged bribery, Plaintiffs
have failed to plead that bribery was used to manage political risk at all.
This argument is not well taken. Admittedly, political risk is a broad concept, but it is not as
amorphous as Defendants make it out to be. The offering memoranda sufficiently contextualize the
meaning of political risk by describing CNO’s work in countries such as Peru, Angola, and
Venezuela persisting despite periods of “social unrest or war.” See, e.g., TAC ¶ 131; see also Pls’
Opp’n, Dkt. No. 79 (“Opp.”) at 5-6, 21. CNO claimed that its success in managing political risk
stemmed from project diversification, extensive risk assessment and sharing, joint ventures with
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local companies, and integration with the communities in which CNO operated. TAC ¶ 131. But,
as Plaintiffs allege, another critical facet of this success was the billions of dollars of bribes paid to
government officials in these countries. TAC ¶ 62; see also In re Par Pharm., Inc. Sec. Litig., 733 F.
Supp. 668, 677-78 (S.D.N.Y. 1990) (statements suggesting that defendant had particular ability to
obtain FDA approval could have been misleading as defendant’s success in getting approvals was
due to bribery of FDA employees). Regardless, the dispute over whether a reasonable investor
would have understood “political risk” to mean falling out of favor with the political authority du jour
presents a factual dispute, not a legal one. Determining whether a reasonable investor, in the
exercise of due care, would have received a false impression from a statement requires “delicate
assessments of the inferences a ‘reasonable shareholder’ would draw from a given set of facts.” TSC
Indus., 426 U.S. at 450. This decision is therefore generally a question of fact for the jury. See SEC v.
Texas Gulf Sulphur, 401 F.2d 833, 863 (2d cir. 1968) (remanding for the district court as factfinder to
apply “the standard of whether the reasonable investor, in the exercise of due care, would have been
misled by [the press release].”).
Compliance with local regulations: The Notes’ offering memoranda also informed
investors regarding the scope of CNO’s regulatory obligations. Plaintiffs characterize those
statements as material misstatements because they falsely portray CNO as complying with local laws.
The memoranda describe CNO as “required to obtain all necessary licenses” and as “obliged to
comply with all applicable regulations imposed on the local and state level.” TAC ¶¶ 133-134, 15253, 169-70. These statements say nothing about CNO’s actual compliance with those regulations.
Further, “[i]t 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.’ This is particularly true where, as here, the statements are
explicitly aspirational, with qualifiers such as ‘aims to,’ ‘wants to,’ and ‘should.’” City of Pontiac, 752
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F.3d at 183. CNO’s statements fall even further outside the circle of actionable statements than
aspirational puffery; they reflect the company’s obligations, not its intentions or practice.
Other claims: Plaintiffs alleged that many other statements in Defendants’ offering
memoranda were false and misleading. Those include statements about CNO’s backlog of
contracts, TAC ¶¶ 127, 146, 163, 184, 194, and that CNO has historically obtained important
international projects, TAC ¶ 137, 173. Plaintiffs also alleged that some of OSA’s statements were
also false or misleading, including OSA’s reported adherence to the company’s internal code of
conduct, TAC ¶¶ 219-29, and comments OSA made about Marcelo Odebrecht’s role in the bribery
scheme, TAC ¶¶ 234-48. In their motion to dismiss, Defendants have argued that these statements
are all inactionable. Plaintiffs did not oppose any of the arguments and have therefore abandoned
their Section 10(b) claims in connection with those misstatements. See August 2018 Op. at 449
(citing cases).
c. Credit Ratings
Although this Court previously dismissed the Plaintiffs’ allegations that CNO’s statements
regarding its prior credit ratings were materially false or misleading, see August 2018 Op. at 448,
Plaintiffs contend that CNO’s disclosure of those ratings are half-truths because CNO never
admitted that the ratings would not have been as high absent the illicit bribery scheme, see Opp. at
22. Again, this Court disagrees.
Multitudes of case law in this district foreclose any argument that accurate statements about
past performance could be actionable under the securities laws. See, e.g., In re EDAP TMS S.A. Sec.
Litig., No. 14-cv-6069 (LGS), 2015 WL 5326166, at *10 (S.D.N.Y. Sept. 14, 2015) (finding
statements inactionable when they only “comment[ed] on the evolving status of the Company’s
PMA application”); Panther Partners, Inc. v. Ikanos Commc’ns, Inc., 538 F. Supp. 2d 662, 668 (S.D.N.Y.
2008) (“[I]t is undisputed that accurate statements of historical fact . . . are nonactionable.”
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(quotation omitted)); In re IAC/InterActiveCorp Sec. Litig., 478 F. Supp. 2d 574, 594 (S.D.N.Y. 2007)
(“[M]any of the statements merely cite historical facts . . . and as such are not actionable under the
securities laws.”). Even though CNO may have known that it could not support these artificially
inflated credit ratings indefinitely, the “[t]he disclosure of accurate historical data does not become
misleading even if less favorable results might be predictable by the company in the future.” In re
Initial Pub. Offering Sec. Litig., 358 F. Supp. 2d 189, 210 (S.D.N.Y. 2004) (quoting In re Sofamor Danek
Grp., Inc., 123 F.3d 394, 401 n.3 (6th Cir. 1997). The credit ratings reported by Defendants were
factually accurate. Thus, Plaintiffs have not sufficiently pleaded that CNO’s statements about its
prior credit ratings were false or misleading.
***
Because Plaintiffs adequately plead that CNO’s financial statements violated Brazilian GAAP
and included materially false and misleading statements about CNO’s financial strengths and ability
to manage political risk, those claims survive. Defendants did not challenge Plaintiffs’ allegations
that CNO made false and misleading statements about the reason for CNO’s success in Venezuela,
TAC ¶¶ 135, 154, 171, 190, competitiveness in Brazil, TAC ¶¶ 129, 148, 165, 186, and disclosures in
the 4.375% Notes about CNO’s overall main competitive strengths, TAC ¶ 177, thus those claims
also survive dismissal. Defendants’ motion is granted with respect to Plaintiffs’ remaining claims.
2. Loss Causation
A plaintiff’s burden to plead loss causation is “not a heavy one.” Loreley Fin. (Jersey) No. 3
Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160, 187 (2d Cir. 2015); see also In re VEON Ltd. Sec. Litig., No.
15-cv-08672 (ALC), 2017 WL 4162342, at *11 (S.D.N.Y. Sept. 19, 2017). To plead loss causation, a
plaintiff must allege “that the subject of the fraudulent statement or omission was the cause of the
actual loss suffered.” Suez Equity Investors, L.P. v. Toronto–Dominion Bank, 250 F.3d 87, 95 (2d Cir.
2001). She may do so either by alleging (a) “the existence of cause-in-fact on the ground that the
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market reacted negatively to a corrective disclosure of the fraud;” or (b) that “‘that the loss was
foreseeable and caused by the materialization of the risk concealed by the fraudulent statement.’” In
re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 511, 513 (2d Cir. 2010) (quoting ATSI, 493 F.3d at
107).
To plead loss causation by materialization of risk, a plaintiff must plead facts to show that
“the loss was foreseeable and caused by the materialization of the risk concealed by the fraudulent
statement.” In re Omnicom, 597 F.3d at 513 (quoting ATSI, 493 F.3d at 107). Under this theory, a
misstatement or omission is “the ‘proximate cause’ of an investment loss if the risk that caused the
loss was within the zone of risk concealed by the misrepresentations.” Id. (quoting Lentell v. Merrill
Lynch & Co., Inc., 396 F.3d 161, 173 (2d Cir. 2005)). This zone of risk is determined by the purposes
of the securities laws—namely, “to make sure that buyers of securities get what they think they are
getting.” Chem. Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 (2d Cir. 1984). Plaintiffs need not
allege that their entire loss was caused by the misstatements and omissions complained of, only “that
plaintiffs would have been spared all or an ascertainable portion of the that loss absent the fraud.”
Lentell, 396 F.3d at 175.
Pleading a materialization of the risk requires identifying a particular risk that was allegedly
concealed by the defendant’s actions and which then materialized to cause a market loss. See
Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 157-58 (2d Cir. 2007) (risk of impending
bankruptcy was not concealed by audit opinion); Lentell, 396 F.3d at 177 (risk of stock volatility was
not concealed by “buy” and “accumulate” recommendations); Emergent Capital Inv. Mgmt., LLC v.
Stonepath Group, Inc., 343 F.3d 189, 197-98 (2d Cir. 2003) (risk of defendants’ “dumping” their own
shares of company stock was concealed by failure to reveal previous “pump and dump” schemes by
the defendants); Suez Equity Investors, 250 F.3d at 970-98 (risk of liquidity crisis was concealed by
edited background report omitting important negative events in executive’s financial and business
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history); see also In re Lehman Bros. Sec. & Erisa Litig., 131 F. Supp. 3d 241, 264 (S.D.N.Y. 2015)
(discussing a case where plaintiffs’ pleading of ratings downgrades and unexpected asset sales
adequately alleged the materialization of the company’s concealed liquidity risk). In their third
amended complaint, Plaintiffs did exactly that.
One of the risks CNO shouldered when preparing materially false or misleading financial
statements was the possibility that auditors would refuse to certify its financial statements and delay
the release of its financial reporting. Opp. at 7. This heightened scrutiny, Plaintiffs contend, was a
foreseeable consequence of falsifying financial information, and the risk materialized when
accountants refused to certify the statements, resulting in the anticipated delay of the company’s
reporting. The unexpected delay caused holders of the company’s debt to “panic” and sell,
prompted rating agencies to downgrade the Odebrecht Finance bonds. TAC ¶ 263.
Plaintiffs also allege that CNO issued financial statements that did not accurately describe
the company’s operating margins, costs, likelihood of future success in winning construction
contracts, and—most importantly—exposure to government investigation, thereby obscuring the
fact that CNO was a volatile, devaluation-prone investment. The risk that materialized—namely,
CNO’s devaluation—came about when credit rating agencies lowered the rating of the company,
finding that CNO’s credit profile would be affected by corruption investigations. TAC ¶¶ 260-61.
Again, the market reacted immediately to these revelations. TAC ¶ 262.
Relying on the Court’s earlier analysis, Defendants argue that Plaintiffs’ third amended
complaint fail to satisfy loss causation in the same way that the second amended complaint failed:
namely, none of Plaintiffs’ identified disclosures “provide[d] the market with new information.”
MTD at 9-10, Pls’ Mem. Reply, Dkt No. 80 (“Reply”) at 1-2; see also August 2018 Op. 456-58. True,
the August 2018 Opinion found that only two June 2015 articles about OSA sufficiently provided
the market with new information to satisfy loss causation. August 2018 Op. at 458-59. But in its
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prior opinion, the Court had dismissed all of Plaintiffs’ Section 10(b) and Rule 10b-5 claims against
CNO—except those based on CNO’s opinion statements regarding the reasons for its success—by
the time it began its loss causation analysis. Now that Plaintiffs have properly pleaded other Section
10(b) and Rule 10b-5 claims, such as those involving CNO’s GAAP violations and falsified financial
statements, the Court can evaluate whether any of those misstatements were the reason that Plaintiffs’
bet on Odebrecht Finance’s Notes turned out to be a losing one.
Put plainly, although Defendants argue that the 2015 reporting broke open the story of
OSA’s involvement in the bribery and kickback scheme, leaving nothing new for the market to learn
about CNO’s misstatements and omissions, it is CNO’s concealment of the scheme and false
financial reporting—not the company’s involvement in the scheme itself—that resulted in a risk materializing
in 2016. Pleading a materialization of the risk requires identifying a particular risk that was allegedly
concealed by the defendant’s actions and which then materialized to cause a market loss. As
discussed above, Plaintiffs here have done just that.
Defendants also seize on a footnote in the Court’s August 2018 Opinion, and now argue
that neither of the two June 2015 articles mention CNO by name, and therefore could not constitute
corrective disclosures with respect to CNO. Reply at 4-5. The articles’ failure to specifically identify
CNO is irrelevant. The June 20, 2015 New York Times piece, for example, revealed that Brazilian
police had proof that senior Odebrecht executives “knew about the practice of overbilling contracts
with Petrobras” and “participated directly in the division of the contracts within the cartel.” August
2018 Op. at 457-459; Decl. of Michael Carlinsky Supp. Defs’ Mot. to Dismiss, Dkt. No. 76, Ex. D at
1. CNO was the subgroup of Odebrecht executing those Petrobras contracts. See, e.g., TAC ¶ 107
(describing revenue CNO received from its Petrobras contracts). Thus, this article sufficiently
reveals the falsity of CNO’s statements that its successful bidding within Brazil was the result of
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legitimate factors. And market-watchers certainly knew that any discussion of OSA’s involvement in
the “Car Wash” scandal implicated its wholly-owned subsidiaries as well.
***
In sum, Plaintiffs adequately plead loss causation for their remaining Section 10(b) and Rule
10b-5 claims against CNO, and those claims all survive Defendants’ motion to dismiss.
3. OEC’s Successor Liability
Generally, under New York common law,4 a business entity’s acquisition of assets from
another,5 as alleged by Plaintiffs here, see TAC ¶¶ 38-41, “results in no successor liability, with four
exceptions: (1) the successor corporation expressly or impliedly assumed the liabilities of its
predecessor; (2) there was a consolidation or de facto merger of the two business entities; (3) the
successor is a ‘mere continuation’ of the predecessor; or (4) the transaction is entered into
fraudulently to escape such obligations.” Societe Anonyme Dauphitex v. Schoenfelder Corp., No. 07-cv489, 2007 WL 3253592, at *2 (S.D.N.Y. Nov. 2, 2007). “[P]leadings of successor liability are subject
to the lenient pleading requirements of Rule 8(a), not the more rigorous standards of Rule 9(b).”
Old Republic Ins. Co. v. Hansa World Cargo Serv., Inc., 170 F.R.D. 361, 376 (S.D.N.Y. 1997).
The hallmarks of a de facto merger include: “(1) continuity of ownership; (2) a cessation of
ordinary business and dissolution of the acquired corporation as soon as possible; (3) assumption by
the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business
of the acquired corporation; and (4) a continuity of management, personnel, physical location, assets,
and general business operation.” Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41, 46 (2d Cir. 2003)
(quoting Fitzgerald v. Fahnestock & Co., 730 N.Y.S.2d 70, 71 (1st Dep’t 2001). Legal dissolution is not
The offering memoranda provided that the indenture, notes and the guaranty would be governed by the
laws of the State of New York. Declaration of Michael B. Carlinsky, Ex. F at 24. The parties do not dispute
the applicability of New York law here.
5 In the TAC, Plaintiff describes what it later calls the “de facto merger” as a corporate restructuring. See
TAC ¶ 38-41.
4
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necessary as long as the acquired corporation is “shorn of its assets and has become, in essence, a
shell.” Fitzgerald, 730 N.Y.S.2d at 72.
The de facto merger and mere continuity exceptions work to “avoid the patent injustice which
might befall a party simply because a merger has been called something else.” Cargo Partner, 352
F.3d 41, 46-47 (2d Cir. 2003) (quotation omitted). Thus, New York law requires courts to apply
these tests “in a flexible manner . . . disregard[ing] mere questions of form,” Tap Holdings, LLC v.
Orix Fin. Corp., 970 N.Y.S.2d 178, 184 (1st Dep’t 2013) (quotation omitted), recognizing “the
realities of the transaction that took place,” Miller v. Forge Mench P’ship Ltd., No. 00-cv-4314 (MBM),
2005 WL 267551, at *8 (S.D.N.Y. Feb. 2, 2005). See also In re Gen. Motors LLC Ignition Switch Litig.,
No. 14-mc-2543 (JMF), 2018 WL 1989572, at *2 (S.D.N.Y. Apr. 25, 2018). Numerous cases
support the notion that not all four elements are necessary for a court to find a de facto merger. See
Martin Hilti Family Tr. v. Knoedler Gallery, LLC, 386 F. Supp. 3d 319, 350 (S.D.N.Y. 2019). Instead,
the heart of a merger is continuity of ownership. Cargo Partner, 352 F.3d at 47.
OEC was founded in January 2014. TAC ¶ 38. In March 2015, it became “the direct
controller” of CNO. TAC ¶¶ 17, 39. According to Plaintiffs, CNO became “an empty shell” after
this corporate reorganization. TAC ¶ 40. It no longer reports quarterly or annual earnings; it
relinquished its contracts to OEC, and OEC became the guarantor of all previously-issued
Odebrecht Finance Notes that CNO used to guarantee. TAC ¶ 44. Further, Plaintiffs allege that at
least five of OEC’s senior officers in 2015 had been officers at CNO, and that a sixth had been a
CNO director. TAC ¶ 47. OEC took over CNO’s physical location and address, projects, assets
and liabilities, and identity as a corporation founded in 1944 that expanded in the 1970s taking on
projects such as the Rio de Janeiro international airport and State University. TAC ¶¶ 48-49, 51-53.
Thus, Plaintiffs contend, OEC is subject to CNO’s liabilities under either New York’s de facto merger
or mere continuation exception.
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Defendants challenge these allegations, claiming that Plaintiffs’ complaint fails because it did
not allege facts supporting that CNO sold or transferred any assets to OEC. MTD at 22. Much of
Defendants’ argument hinges on the Plaintiffs’ characterization of CNO as a “mere shell” rather
than alleging that CNO was legally dissolved. MTD at 22-24. In support of its contentions,
Defendants ask the Court to review a report by Moody’s that it argues Plaintiffs incorporated into
the third amended complaint. MTD at 22-23. The rest of Defendants’ argument concerns
Plaintiffs’ pleading only that OEC began guaranteeing CNO’s Notes, not that CNO stopped
guaranteeing the Notes. This, according to Defendants, demonstrates that Plaintiffs did not
adequately plead that OEC assumed CNO’s liabilities.
Defendants’ argument does not move the needle in the context of this motion to dismiss.
The Moody’s report does not necessarily contradict the complaint; it simply quotes Odebrecht press
releases that, according to a generous reading of Plaintiffs’ complaint, proved inaccurate when CNO
stopped reporting any earnings. Without that paragraph of the complaint, Plaintiff already noted
that CNO was longer functioning as a full-fledged corporation, replaced, instead, by OEC. TAC
¶ 43-44. For example, Plaintiff pleaded that OEC now holds CNO’s construction contracts, noting
that OEC’s financial statements describe CNO’s projects as its own, and that even third parties
considered OEC to be CNO’s new identity. TAC ¶¶ 51-52. CNO, Plaintiffs allege, has not
reported quarterly or annual earnings since 2015. TAC ¶ 44. Instead, OEC operates out of CNO’s
old address, with much of the same officers, and has coopted much of CNO’s corporate history.
TAC ¶¶ 47-50. Even if both CNO and OEC are guaranteeing the operative Notes, these allegations
satisfy Federal Rule of Civil Procedure 8(a)(2)’s liberal pleading requirement. See Beck v. Roper
Whitney, Inc., 190 F. Supp. 2d 524, 535 (W.D.N.Y. 2001) (finding de facto merger when there was “a
continuity of assets, physical location, and general business operations, as well as an assumption of
certain liabilities necessary for the uninterrupted continuation of the business”); see also NYKCool
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A.B. v. Pac. Int'l Servs., Inc., No. 12 CIV. 5754 LAK AJP, 2013 WL 1274561, at *14–15 (S.D.N.Y.
Mar. 29, 2013), aff’d sub nom. NYKCool A.B. v. Ecuadorian Line, Inc., 562 F. App’x 45 (2d Cir. 2014)
(citing cases where the standard is satisfied because plaintiff provided evidence of continuity of
business and management from the same location with the same employees selling the same
products).
Finally, Defendants attack Plaintiffs’ pleading on the grounds that the third amended
complaint sometimes uses the present tense to describe CNO, and other times employs the past
tense. Reply at 13. Drawing all reasonable inferences in Plaintiffs’ favor, as we must, this inartful
drafting does not create the internal inconsistencies necessary to defeat the third amended
complaint’s claims.
4. OSA’s Materially False and Misleading Statements
a. Jurisdiction Over OSA
Defendants move to dismiss all claims against OSA for lack of personal jurisdiction. On a
motion to dismiss pursuant to Rule 12(b)(2), the “plaintiff bears the burden of demonstrating
personal jurisdiction over a person or entity against whom it seeks to bring suit.” Penguin Grp. (USA)
Inc. v. Am. Buddha, 609 F.3d 30, 34 (2d Cir. 2010) (citing In re Magnetic Audiotape Antitrust Litig., 334
F.3d 204, 206 (2d Cir. 2003) (per curiam)); see also Bank Brussels Lamberts v. Fiddler Gonzalez &
Rodriguez, 171 F.3d 779, 784 (2d Cir. 1999) (Sotomayor, J.) (“When responding to a Rule 12(b)(2)
motion to dismiss for lack of personal jurisdiction, the plaintiff bears the burden of establishing that
the court has jurisdiction over the defendant.” (citation omitted)). But at the pleading stage—before
the parties have engaged in discovery practice— a plaintiff need only make a prima facie showing that
jurisdiction exists. Dorchester Fin. Sec., Inc. v. Banco BRJ, S.A., 722 F.3d 81, 84-85 (2d Cir. 2013); see
also Eades v. Kennedy, PC Law Offices, 799 F.3d 161, 167-68 (2d Cir. 2015).
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If the court considers only pleadings and affidavits, a plaintiff’s prima facie showing “must
include an averment of facts that, if credited by the ultimate trier of fact, would suffice to establish
jurisdiction over the defendant.” In re Terrorist Attacks on Sept. 11, 2001, 714 F.3d 659, 673 (2d Cir.
2013) (quoting Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 163 (2d Cir. 2010)). Courts may
rely on materials outside the pleading in considering a motion to dismiss for lack of personal
jurisdiction. See DiStefano v. Carozzi N. Am., Inc., 286 F.3d 81, 84-85 (2d Cir. 2001). “The allegations
in the complaint must be taken as true to the extent they are uncontroverted by the defendant’s
affidavits.” MacDermid, Inc. v. Deiter, 702 F.3d 725, 727 (2d Cir. 2012) (quoting Seetransport Wiking
Trader Schiffarhtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572,
580 (2d Cir. 1993)).
In determining whether it may exercise personal jurisdiction over a defendant, the Court
engages in a two-step inquiry. First, the Court must determine whether there is a “statutory basis for
exercising personal jurisdiction.” Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 128 (2d Cir. 2013)
(citation omitted). A federal court applies the forum state’s personal jurisdiction rules unless a
federal statute “specifically provide[s] for national service of process.” Brown v. Lockheed Martin Corp.,
814 F.3d 619, 624 (2d Cir. 2016) (quoting PDK Labs, Inc. v. Friedlander, 103 F.3d 1105, 1108 (2d Cir.
1997)). Second, the Court must determine whether the exercise of personal jurisdiction over the
defendant would comport with due process under the Constitution. Licci v. Lebanese Canadian Bank,
SAL, 673 F.3d 50, 59-60 (2d Cir. 2012).6
The statutory analysis in cases brought under the Exchange Act is relatively straightforward:
Section 27 of the Exchange Act, 15 U.S.C. § 78aa “permits the exercise of personal jurisdiction to
the limit of the Due Process Clause of the Fifth Amendment.” SEC v. Unifund SAL, 910 F.2d 1028,
The defendant must also have been properly served. Licci, 673 F.3d at 59. Defendants noted in their
motion that Plaintiffs failed to properly serve OSA, but Plaintiffs have since remedied that problem. See
Opp. at 28.
6
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1033 (2d Cir. 1990). Thus, the sole question here is whether due process permits the exercise of
jurisdiction over OSA.7
Due process requires that if a defendant is “not present within the territory of the forum, he
[must] have certain minimum contacts with it such that the maintenance of the suit does not offend
traditional notions of fair play and substantial justice.” Int’l Shoe Co. v. Washington, 326 U.S. 310, 316
(1945). The analysis proceeds in two parts: the “minimum contacts” analysis and the
“reasonableness” inquiry. Metro. Life Ins. Co. v. Robertson-Ceco Corp., 84 F.3d 560, 567 (2d Cir. 1996).
To establish the minimum contacts necessary to satisfy due process with respect to a
nonresident defendant, a plaintiff must show that its “claim arises out of, or relates to, the
defendant’s contacts with the forum . . . [and that] the defendant purposefully availed itself of the
privilege of doing business in the forum and could foresee being haled into court there.” Bank
Brussels Lambert v. Fiddler Gonzalez & Rodriguez, 305 F.3d 120, 127 (2d Cir. 2002) (quotation omitted).
Although foreseeability is a component of the minimum contacts analysis, “foreseeability alone has
never been a sufficient benchmark for personal jurisdiction under the Due Process Clause.” WorldWide Volkswagen Corp. v. Woodson, 444 U.S. 286, 295 (1980). “Because the Exchange Act authorizes
worldwide service of process, the relevant contacts for purposes of the ‘minimum contacts’ analysis
are those with the United States as a whole.” In re Banco Bradesco S.A. Sec. Litig., 277 F. Supp. 3d 600,
642 (S.D.N.Y. 2017). “The second part of the jurisdictional analysis asks ‘whether the assertion of
Ordinarily, a plaintiff must plead personal jurisdiction with respect to each claim asserted. Sunward Elecs.,
Inc. v. McDonald, 362 F.3d 17, 24 (2d Cir. 2004). But the doctrine of pendent personal jurisdiction provides
that “where a federal statute authorizes nationwide service of process, and the federal and state-law claims
derive from a common nucleus of operative fact, the district court may assert personal jurisdiction over the
parties to the related state-law claims even if personal jurisdiction is not otherwise available.” IUE AFL–CIO
Pension Fund v. Herrmann, 9 F.3d 1049, 1056 (2d Cir. 1993) (internal quotation marks and citation omitted).
Because the Court finds that Plaintiffs’ sufficiently allege a prima facie showing of personal jurisdiction with
respect to the federal claims here, Plaintiffs need not establish jurisdiction for their state law claims stemming
from the sale of the same Odebrecht Finance bonds.
7
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personal jurisdiction comports with ‘traditional notions of fair play and substantial justice’—that is,
whether it is reasonable under the circumstances of the particular case.” Bank Brussels Lambert, 305
F.3d at 129 (quotation omitted). If the defendant’s contacts with the forum do rise to that level of
“minimum contacts,” a defendant may defeat jurisdiction only by presenting “a compelling case that
the presence of some other considerations would render jurisdiction unreasonable.” Burger King
Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985).
Plaintiffs reference various OSA activities in support of their assertion that OSA’s contacts
with the United States justify jurisdiction. The third amended complaint tells a story of OSA
representatives travelling on road shows in the United States to sell Notes whose offering
memoranda various incorporated false or misleading statements and specifically participating in
actions directed to deceive United States shareholders. At least one of those road shows took place
in 2013 in Miami. TAC ¶ 92. To enforce SEC regulations, courts have exercised jurisdiction where
“an executive of a foreign securities issuer, wherever located, participates in a fraud directed to
deceiving United States shareholders” See SEC v. Straub, 921 F. Supp. 2d at 244, 256-57 (S.D.N.Y.
2013) (quotation omitted). Here, OSA even deployed an Investor Relations executive to Miami fulltime to respond to investor inquiries in an effort to better sell those Notes. See TAC ¶ 92.
Defendants’ challenges as to the particularity of these allegations—namely, that Plaintiff failed to
state who went to what conference and when—do not change the analysis. Plaintiffs need only
make a prima facie showing of jurisdiction. They did. See J. McIntyre Machinery, Ltd. v. Nicastro, 564
U.S. 873, 884 (2011) (“The question is whether a defendant has followed a course of conduct
directed at the society or economy existing within the jurisdiction of a given sovereign, so that the
sovereign has the power to subject the defendant to judgment concerning that conduct.”).
Once a plaintiff has demonstrated the requisite minimum contacts between the defendant
and the forum state, a court must evaluate “(1) the burden that the exercise of jurisdiction will
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impose on the defendant; (2) the interests of the forum state in adjudicating the case; (3) the
plaintiff’s interest in obtaining convenient and effective relief; (4) the interstate judicial system’s
interest in obtaining the most efficient resolution of the controversy; and (5) the shared interest of
the states in furthering substantive social policies.” Metro. Life Ins., 84 F.3d at 568 (citing Asahi Metal
Indus. Co. v. Super. Ct., 480 U.S. 102, 113-14 (1987)). “This prong of the inquiry rarely defeats
jurisdiction where a defendant has sufficient forum contacts, and is largely academic in non-diversity
cases brought under a federal law which provides for nationwide service of process.” Banco Bradesco,
277 F. Supp. 3d at 645 (quotation omitted).
Defendants make no argument that the Court’s jurisdiction over them would be
unreasonable. Nevertheless, the Court has evaluated the three applicable factors8 underlying the
reasonableness inquiry and does not find that any of them caution against its exercise of jurisdiction
here. First, the only potential burden this Court can imagine that the litigation may impose is the
inconvenience of litigating in a foreign forum. Because Defendants have said nothing about this
potential inconvenience, the Court cannot conclude that this is the “rare case[]” in which
inconvenience is “so substantial as to achieve constitutional magnitude.” Asahi, 480 U.S. at 116
(Brennan, J., concurring) (emphasis in original); Burger King, 471 U.S. at 484. With respect to the
second factor, because this is a case brought under U.S. federal law, the judicial system has a strong
interest in resolving it here. See Straub, 921 F. Supp. 2d at 259. Additionally, Plaintiffs’ interest in
obtaining a convenient and efficient resolution of this dispute is self-evidently robust.
This Court therefore finds that it can exercise specific jurisdiction over OSA.
The Court does not understand the fourth and fifth factors of the reasonableness inquiry to be relevant to
this case.
8
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b. OSA’s Misstatements
Most of Plaintiffs’ federal claims against OSA, however, fail on the merits. First, in their
motion to dismiss, Defendants objected that OSA’s statements are all inactionable. Plaintiffs did
not oppose any of Defendants’ arguments and have therefore abandoned those claims. Even if
Plaintiffs had not abandoned the claims, statements “too general to cause a reasonable investor to
rely upon them” are inactionable as a matter of law. City of Pontiac, 752 F.3d at 183. The
quintessential examples of such inactionable puffery are “general statements about reputation,
integrity, and compliance with ethical norms,” particularly when such statements are “explicitly
aspirational, with qualifiers such as ‘aims to,’ ‘wants to,’ and ‘should.’” Id. To be sure, in some
cases, corporate statements regarding compliance policies have been held actionable. See In re
Petrobras Sec. Litig., 116 F.Supp.3d 368, 381 (S.D.N.Y. 2015); Novak, 216 F.3d at 315 (finding general
statements that inventory was “in good shape” and “under control” actionable where defendants
knew contrary was true); Arkansas Teacher Ret. Sys. v. Bankrate, Inc., 18 F.Supp.3d 482, 485 (S.D.N.Y.
2014) (“[W]hile a term like ‘high quality’ might be mere puffery or insufficiently specific to support
liability in some contexts, it is clearly a material misrepresentation when applied to assets that are
entirely worthless . . . .”). But the statements at issue in these cases went beyond aspirational or
general puffery, so as, for example, to falsely represent a record of past or present compliance with
such policies. Context is key.
OSA’s statements that the company is grounded in a seventy-year ethos of service is
textbook puffery. And the context of these statements here change nothing. Plaintiffs do not
allege, for example, that OSA revised its code of conduct to prohibit bribery in reaction or response
to market concerns that the company may have bribed politicians or been otherwise implicated in
the “Car Wash” scandal. OSA just made general and generic statements that are not the kind of
guarantees actionable under the securities laws. See In re Braskem S.A. Sec. Litig., 246 F. Supp. 3d 731,
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756 (S.D.N.Y. 2017) (finding inactionable similar allegations of misstatements in another company’s
code of ethics and anti-bribery prohibitions).
Finally, Plaintiffs’ claim that OSA’s Head of Investor Relations materially mislead investors
when, responding to Plaintiffs’ questions about the search warrants police had served on CNO, she
informed Plaintiffs that the “‘main accusation is that Odebrecht is part of a cartel’ and that
Defendants believed that this accusation is ‘weak.’” TAC ¶ 229. Defendants argue that Plaintiffs
failed to plead facts supporting Defendants’ awareness of the true subject of the police warrants.
Again, Plaintiff did not oppose Defendants’ position and have therefore abandoned its claim in
connection with that misstatements.
c. Control Person Liability
Plaintiffs also assert that OSA is liable under Section 20(a) for CNO’s misstatements. To
prevail under Section 20(a), “‘a plaintiff must show (1) a primary violation by the controlled person,
(2) control of the primary violator by the defendant, and (3) that the defendant was, in some
meaningful sense, a culpable participant in the controlled person’s fraud.’” Carpenters Pension Tr.
Fund, 750 F.3d at 236 (quoting ATSI, 493 F.3d at 108). As to the second element, control over a
primary violator, “a plaintiff must allege ‘that the defendant possessed the power to direct or cause
the direction of the management and policies of a person, whether through the ownership of voting
securities, by contract, or otherwise.’” In re BISYS Sec. Litig., 397 F. Supp. 2d 430, 451 (S.D.N.Y.
2005) (quoting SEC v. First Jersey Sec. Inc., 101 F.3d 1450, 1472-73 (2d Cir. 1996)). The third element,
culpable participation, requires that plaintiff show “actual involvement in the making of the
fraudulent statements by the putatively controlled entity.” In re Refco, Inc. Sec. Litig., 503 F. Supp. 2d
611, 663 (S.D.N.Y. 2007) (quotation omitted). Some cases have described this third requirement—
“a regular fixture of the Second Circuit’s jurisprudence” but not identified in Section 20(a)’s
statutory language—as a description of the “degree of control” necessary to “render a person liable”
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under Section 20(a). See SEC v. Lek Sec. Corp., 276 F. Supp. 3d 49, 63 (S.D.N.Y. 2017). This can
result in collapsing the distinction between the second and third prongs—as Defendants do here9—
but these elements require distinct analytical attention.
Courts within the Second Circuit broadly construe the control person provisions “as they
‘were meant to expand the scope of liability under the securities laws.’” CompuDyne Corp. v. Shane,
453 F. Supp. 2d 807, 829 (S.D.N.Y. 2006) (quoting Dietrich v. Bauer, 126 F. Supp. 2d 759, 765
(S.D.N.Y. 2001)). “Allegations of control are not averments of fraud and therefore need not be
pleaded with particularity.” In re Parmalat Sec. Litig., 414 F. Supp. 2d 428, 440 (S.D.N.Y. 2006); see
also In re Scottish Re Group Sec. Litig., 524 F. Supp. 2d 370, 386 (S.D.N.Y. 2007) (“[A]t the pleading
stage, the extent to which the control must be alleged will be governed by Rule 8’s pleading
standard.”). The heightened pleading standards of the PSLRA, however, apply with respect to the
third-prong of a Section 20(a) claim, which requires plaintiffs to allege facts demonstrating that the
defendant was a culpable participant. See Special Situations Fund III QP, L.P. v. Deloitte Touche Tohmatsu
CPA, Ltd., 33 F. Supp. 3d 401, 439 (S.D.N.Y. 2014) (surveying district courts’ interpretation of
“culpable participation” and concluding that the Second Circuit requires Section 20(a) plaintiffs to
plead “facts indicating that the controlling person knew or should have known that the primary
violator, over whom that person had control, was engaging in fraudulent conduct” (quoting Burstyn,
2002 WL 31191741, at *8)); see also In re ForceField Energy Inc. Sec. Litig., No. 15-cv-3020 (NRB), 2017
WL 1319802, at *16 (S.D.N.Y. Mar. 29, 2017) (further surveying cases and finding that “most judges
in th[is] District [have] found that a plaintiff must plead culpable participation with scienter”).
Defendants’ citation to Arkansas Teacher Retirement System v. Bankrate, Inc., clearly demonstrates their
conflation of these two elements. 18 F. Supp. 3d 482, 486 (S.D.N.Y. 2014). In Arkansas Teacher, the plaintiffs
alleged that the Apex defendants controlled more than half of Bankrate’s stock and filled four of the seven
seats on Bankrate’s board. Id. The Court determined that the plaintiffs satisfied the “control” prong—but
not the “culpable participation” one because they alleged “no particularized facts suggesting that the Apax
entities had control over the alleged misrepresentations at issue in this case” and therefore could not have
been culpable participants in the defendants’ fraud. Id.
9
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Because the Court has found that most of CNO’s underlying primary violations of Section
10(b) and Rule 10b-5 survive Defendants’ motion to dismiss, Plaintiffs sufficiently meet the first
prong of the control person test. See In re: EZCorp, Inc. Sec. Litigs., 181 F. Supp. 3d 197, 214
(S.D.N.Y. 2016) (finding that shareholders had made out the “control” prong against a defendant
because he was the sole shareholder of voting stock in the company). Plaintiffs’ complaint describes
OSA as directly owning 100% of CNO’s voting shares, and cites to CNO’s disclosures in the
Odebrecht Finance offering memoranda where the company stated that “[a]ll of our total voting
capital is owned by Odebrecht which, in turn, is ultimately controlled by the Odebrecht family . . . .
Accordingly, the Odebrecht family has the ability to . . . exercise overall control of our
management.” TAC ¶¶ 31-33.10
Defendants challenge Plaintiffs’ characterization of OSA as a “culpable participant,” given
that OSA did not make the alleged misstatements. MTD at 33-35. Viewing the allegations of the
third amended complaint in the light most favorable to Plaintiffs suggests that this third prong, too,
has been adequately pleaded. According to the third amended complaint, OSA’s Division of
Structured Operations was established as the Odebrecht entities’ “bribe department,” managing the
illicit payments to government officials, and concealing them from the reported financial reports of
both CNO and OSA. TAC ¶ 63-69. The Division ensured that CNO’s reported financials did not
reveal the massive illicit payments that OSA was making to politicians by entering all bribery
transactions into a “shadow” accounting database rather than CNO or OSA’s regular accounting
Defendants’ citation to Friedman v. JP Morgan Chase & Co., is unpersuasive. No. 15-CV-5899 (JGK), 2016
WL 2903273, at *10-12 (S.D.N.Y. May 18, 2016), aff’d sub nom. Friedman v. JPMorgan Chase & Co., 689 F. App’x
39 (2d Cir. 2017). Plaintiffs in Friedman were seeking to find JP Morgan liable under Section 20(a) in the
Madoff securities fraud. Although JP Morgan had an ongoing banking relationship with Madoff and had
some general “influence” as a result, the bank was merely an investor that “provided commercial lending
services” and had no power to direct management and policies or exercise control in any way. Id. at *11. To
determine whether JP Morgan had the requisite power to control, the Court interrogated JP Morgan’s
relationship with the Madoff fund at issue. Here though, OSA controls all CNO’s voting shares and,
Plaintiffs allege, exercise “overall control” of CNO management.
10
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system. This ensured that CNO’s financial statements reflecting strong EBIDTA were materially
false or misleading. The head of Structured Operations reported to Marcelo Odebrecht, OSA’s
CEO, and provided periodic updates of the Division’s work. TAC ¶ 66. Marcelo Odebrecht was
also the CEO directing OSA’s road shows and sale of the Odebrecht Finance Notes that
incorporated CNO’s false and misleading statements into its offering memoranda. TAC ¶ 92.
Plaintiffs have sufficiently pleaded that OSA had both the ability to affect CNO’s financial
reports and that it took the opportunity to do so. Cf Arkansas Teacher Ret. Sys., 18 F. Supp. 3d at 486
(internal quotation marks omitted) (finding no control person liability where complaint “alleged no
particularized facts suggesting that the [defendant] had control over the alleged misrepresentations at
issue”). Marcelo Odebrecht was involved in both the concealment of the funds from CNO’s
reporting, and spreading the misstatements in the Odebrecht Finance Notes. Accordingly, Plaintiffs’
federal claims against OSA survive Defendants’ motion to dismiss.
B. State Securities Fraud Claims
1. Negligent Misrepresentation and Fraud
To successfully state a claim for fraud under New York law, a plaintiff must allege “a
material misrepresentation of a fact, knowledge of its falsity, an intent to induce reliance, justifiable
reliance by the plaintiff and damages.” Eurycleia Partners, LP v. Seward & Kissel, LLP, 12 N.Y.3d 553,
559 (2009). Because reasonable reliance is a highly fact-specific inquiry, it is “often not decided at
the motion to dismiss phase of a litigation.” Karsch v. Blink Health Ltd., 291 F. Supp. 3d 503, 507
(S.D.N.Y. 2018).
Having dealt with the question of falsity above, all that remains is to interrogate the
sufficiency of Plaintiffs’ pleading of reliance. In the August 2018 Opinion, this Court dismissed
Plaintiffs’ state-law fraud and negligent misrepresentation causes of action for failing to plead
reliance with particularity. See August 2018 Op. 461-64. The third amended complaint has remedied
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those deficiencies by describing the specific information about CNO’s profit margins and financial
rations that Plaintiffs relied on in purchasing their securities. TAC ¶¶ 294-96. Plaintiffs describe
each report that they read and reviewed before making each purchase of the Notes. TAC ¶¶ 273-98.
Accordingly, the Complaint identifies “specific transactions” and specific reports and statements on
which they allegedly relied in entering into those transactions. Fir Tree Capital Opportunity Master
Fund, L.P. v. Am. Realty Capital Props., Inc., No. 1-cv-4975, 2017 WL 10808809, at *5 (S.D.N.Y. Dec.
14, 2017) (“[P]laintiffs have specifically pled actual reliance . . . and identified specific purchases and
statements upon which they relied.”); accord Gotham Diversified Neutral Master Fund, LP v. Chicago Bridge
& Iron Co. N.V., No. 18-cv-9927 (LGS), 2019 WL 3996519, at *4 (S.D.N.Y. Aug. 23, 2019).
This case is unlike International Fund Management S.A. v. Citigroup Inc., where Plaintiffs stated
only that “in connection with their purchases of Securities after February 23, 2007, Plaintiffs and/or
their investment managers read and relied upon Citi’s 2006 Form 10–K, including the false financial
statements and other statements alleged herein to be false or misleading.” 822 F. Supp. 2d 368, 386
(S.D.N.Y. 2011). The Court there found that statement too broad because it alleged “reliance on
entire 10–Ks for indefinite periods of time” and failed to provide supporting “factual matter
indicating how plaintiffs relied on the alleged misrepresentations.” Id. Here, the complaint makes
separate factual allegations supporting Plaintiffs’ reliance by describing the exact information
Plaintiffs collected in internal reports, and specifies the documents relied upon in each purchase of
Odebrecht Finance Notes.
Thus, Plaintiffs’ negligent misrepresentation and fraud claims survive Defendants’ motion to
dismiss.
2. Conspiracy
Defendants also move to dismiss Plaintiffs’ conspiracy claim. Once again, because the
parties’ briefing assumes that California’s substantive law governs the conspiracy claim at issue,
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“such implied consent is . . . sufficient to establish the applicable choice of law.” Arch Ins. Co. v.
Precision Stone, Inc., 584 F.3d 33, 39 (2d Cir. 2009) (quotations omitted). To state a conspiracy claim
under California law, a plaintiff must allege “(1) formation and operation of the conspiracy and (2)
damages resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.”
Prakashpalan v. Engstrom, Lipscomb & Lack, 223 Cal. App. 4th 1105 (2014), as modified on denial of reh’g
(Feb. 27, 2014) (citation omitted).
Because Plaintiffs have adequately alleged an underlying tort of fraud, the only question for
this Court is whether they adequately allege that CNO’s misrepresentations were made pursuant to
an agreement between OSA and CNO. “It is well settled that bare allegations and rank conjecture
do not suffice for civil conspiracy.” AREI II Cases, 216 Cal. App. 4th 1004, 1022 (2013) (quotation
omitted). “It is not enough that the conspirators knew of an intended wrongful act, they must
agree—expressly or tacitly—to achieve it.” Id. (quotation omitted).
Plaintiffs’ allegations fall short. They plead no facts that Defendants entered into a
conspiracy to defraud investors, merely providing conclusory statements that Defendants did so. See
TAC ¶¶ 328-29. That is insufficient. See Daniels v. Select Portfolio Servicing, Inc., 246 Cal. App. 4th
1150, 1173 (2016) (finding that appellants failed to allege that the respondents conspired to commit
fraud when they allege that respondents “agreed to deceive appellants into participating in the loan
modification processes” but noted that respondents provided “no factual allegations about the
nature of that agreement” (quotations omitted)). Plaintiffs’ conspiracy claim therefore cannot
survive Defendants’ motion to dismiss.
3. New York Debtor and Creditor Law
The August 2018 Opinion permitted Plaintiffs to proceed with the claim under New York
Debtor and Creditor Laws Sections 276 and 276-a. Because that opinion dismissed all claims against
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Odebrecht Finance, Ltd., and Plaintiffs have not repleaded any of those claims, Defendants now
move to dismiss Plaintiffs’ fraudulent conveyance claims for lack of standing.
New York’s Debtor and Creditor Law provides that “[e]very conveyance made and every
obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay,
or defraud either present or future creditors, is fraudulent as to both present and future creditors.”
N.Y. Debt. & Cred. Law § 276. Section 276-a provides for attorneys’ fees in a fraudulent
conveyance action. To bring a cause of action for fraudulent conveyance, the plaintiff must be a
creditor of the transferor of the alleged fraudulent conveyance. See N.Y. Debt. & Cred. Law §§ 27081. A creditor is defined as “a person having any claim, whether matured or unmatured, liquidated
or unliquidated, absolute, fixed or contingent.” Id. § 270. “Under New York’s broad definition of
‘creditor,’ one who has a right to maintain a tort action but has not recovered judgment at the time
of the transfer is a creditor, and that relationship arises the moment the cause of action accrues.”
Drenis v. Haligiannis, 452 F. Supp. 2d 418, 428 (S.D.N.Y. 2006).
In the third amended complaint, Plaintiffs stated that “[a]s a result of the Odebrecht Finance
Conveyances, there are insufficient assets, if any, remaining in Odebrecht Finance’s possession to
satisfy any Judgment that Plaintiff may obtain against Odebrecht Finance.” TAC ¶ 337. Since
Odebrecht Financial is no longer a party to this case, Defendants take this to mean that Plaintiffs
have alleged no injury.
The Court agrees, particularly because of the atypical posture of this claim. In the
paradigmatic fraudulent conveyance case, a debtor corporation denudes a company of assets by
giving them away to preferred insiders or creditors, frustrating the demands of other creditors
lawfully entitled to them. Here, this Court has already decided that Plaintiff cannot maintain an
action against Odebrecht Finance. Thus, Plaintiffs have no claims against the alleged debtor
corporation, and have alleged that any conveyance caused an injured them by precluding Plaintiffs
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from recovering damages from Odebrecht Finance. And even if this Court found that all
Odebrecht Finance’s transfers were fraudulent, Plaintiff has requested no relief that this Court can
provide.
Plaintiffs’ Section 276 and 276(a) claims under New York’s Debtor and Creditor Law are
therefore dismissed for lack of standing.
IV.
CONCLUSION
For the reasons articulated above, Defendants’s motion to dismiss is GRANTED IN PART
and DENIED IN PART.
Plaintiffs state claims under Section 10(b) and Rule 10b-5 against CNO based on CNO’s
GAAP violations; opinion statements regarding its financial strengths, ability to manage political
risk, and reason for CNO’s success in Venezuela and competitiveness in Brazil; and disclosures in
the 4.375% Notes about CNO’s overall main competitive strengths. Plaintiffs also state Section
10(b) and Rule 10b-5 claims again OEC under successor liability to the extent that Plaintiffs stated
those claims against CNO.
Plaintiffs state a Section 20(a) claim against OSA.
Plaintiffs’ other Section 10(b) and Rule 10b-5 claims against CNO, OEC, and OSA are
dismissed without prejudice.
Plaintiffs state a claim for fraud against CNO and OEC.
Plaintiffs state a claim for negligent misrepresentation claim against CNO, OEC, and OSA.
Plaintiffs’ conspiracy claim against CNO, OEC, and OSA is dismissed without prejudice.
Plaintiffs’ Debtor and Creditor Law § 276 claim against CNO, OEC, and OSA is dismissed
without prejudice.
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Plaintiffs are granted leave to replead those claims that have been dismissed without
prejudice no later than thirty (30) days following the date of this order. See Ruotolo v. City of New
York, 514 F.3d 184, 191 (2d Cir. 2008) (noting that leave to amend is “liberally granted”).
The Clerk of Court is directed to terminate the motion pending at Dkt. No. 75.
SO ORDERED.
Dated: September 22, 2019
New York, New York
_____________________________________
GREGORY H. WOODS
United States District Judge
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