Petrobras will finally get its day in a U.S. court on Sept. 19 in a trial that pits 18 former executives and 13 investment banks, including J.P. Morgan Securities, against U.S. and U.K. investors. Claimants are seeking “tens of billions of dollars” in losses from the Brazilian oil and gas giant.
The company is the centerpiece in what has become Brazil’s crime of the century. The scandal involving contract rigging, bribery and money laundering recently brought down a sitting president and promises to devour a chunk of Brazil’s career politicians in criminal probes.
“We are seeking multiple tens of billions of dollars,” says lead counsel Jeremy Lieberman of Pomerantz, the New York law firm leading the charge against Petrobras. “Not only are we challenging company statements on how it engaged in this bribery scheme and inflated its assets, we are saying that Petrobras’ claim that it lost about US$2.5 billion to fraud is wrong. It’s a whole lot more than that.”
The lead plaintiff in the case brought forth by Pomerantz is Universities Superannuation Scheme Limited (USS), a US$ 56 billion pension fund for U.K. university teachers. In the U.S., the North Carolina Department of State Treasurer and the Employees Retirement System of Hawaii are also listed as leaders in the Class Action.
Investing in equity is always a risk. But when large institutional investors buy securities backed on false or misleading claims it becomes an attention-grabbing violation of the United States Securities Exchange Act. Issuers have a choice: settle out of court, or go to trial.
Petrobras shares have lost 81% of their value over the last five years. Its bonds were stripped of investment grade status last year and are now junk. The company is saddled with more than $130 billion in debt, including debt incurred in the acquisition of a 96 year old oil refinery in Pasadena, Texas. The company approved paying over 9 times the market value of the asset with the bulk of the over-pay going to bribes and to Brazil’s ruling party loyalists.
Independent auditors stated that Petrobras directors mispriced building and purchase contracts by around US$30 billion, inflating contracts by at least 20%. Petrobras rejected that assessment.
The lawsuit examines losses starting in January 2010, the year in which Dilma Rousseff became President. Dilma stepped down as President of Petrobras’ Board of Directors in March 2010, the company said.
For now, Dilma and other Brazilian political figures are not part of the U.S. lawsuits, but a lawyer working on a separate case who was not allowed to speak on the record said that “all options on the table.”
Besides U.S. state pension funds, hundreds of investors have filed separate suits against Petrobras and its auditor PricewaterhouseCoopers, including Boston-based trust that manages investment funds for the Bill and Melinda Gates Foundation.
The defendants include ex-CEOs Maria das Graças Silva Foster and José Sérgio Gabrielli de Azevedo. Other names include former IR director Theodore Marshall Helms; Almir Guilherme Barbassa; Paulo Roberto Costa; José Carlos Cosenza; Renato de Souza Duque; Guilherme de Oliveira Estrella; Jose Miranda Formigli Filho; Silvio Sinedino Pinheiro; Daniel Lima de Oliveira; José Raimundo Brandão Pereira; Servio Tulio da Rosa Tinoco; Paulo José Alves; Gustavo Tardin Barbosa; Alexandre Quintão Fernandes; Marcos Antonio Zacarias and Cornelis Franciscus Jozef Looman of Petrobras in The Netherlands.
A horde of U.S.-based investment banks are also listed as criminal defendants. They are cited for selling Petrobras securities and failing to perform proper due diligence on their value. These include Citigroup Global Markets; J.P. Morgan Securities; Itau USA; Morgan Stanley; HSBC Securities USA; Mitsubishi UFJ Securities USA and and Scotia Capital U.S. They have denied all claims against them.