The Petrobras Scandal Resulted in the Largest Foreign Class Action Settlement in History. Meanwhile in Texas, Fifth Circuit Judge Catharina Haynes is bias towards Petrobras

In January and February 2018, Pomerantz, as sole lead counsel for the class, along with lead plaintiff Universities Super-annuation Scheme Limited, achieved a historic $3 billion settlement with Brazil’s energy giant, Petróleo Brasileiro S.A.–Petrobras. The culmination of over three years of hard-fought litigation, this significant victory for investors comprises a $2.95 billion settlement with Petrobras and a $50 million settlement with Petrobras’ auditor, PwC Brazil. This represents the largest securities class action settlement in a decade, the largest settlement ever in a class action involving a foreign issuer, and the fifth-largest class action settlement ever achieved in the United States. It is also the largest settlement ever achieved by a foreign lead plaintiff, and the largest class action settlement in history not involving a restatement of financial reports.

The historic settlement was achieved after over three years of hard-fought litigation: U.S. and foreign discovery and complex motion practice in the Southern District of New York, an appeal at the United States Court of Appeals for the Second Circuit, and a strike during the pendency of a petition by defendants for a writ of certiorari to the United States Supreme Court.

In the litigation, Brazil’s energy giant, Petrobras, was accused of concealing a sprawling, decades-long kickback scheme from investors.

The scandal ensnared not only Petrobras’ former executives but also Brazilian politicians, including former presidents and at least one third of the Brazilian Congress.

According to plaintiffs, defendants’ fraudulent scheme involved billions of dollars in kickbacks, tens of billions of dollars in overstated assets, as well as significant losses to Petrobras investors.

Plaintiffs asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.

Corporate Counsel, in a January 8 article on the first part of the settlement, wrote, “If any general counsel out there are still letting their companies sleepwalk through compliance programs, Wednesday’s $2.95 billion class action settlement with the Brazilian oil company Petrobras should smack them wide awake.”

“The plaintiffs must have been able to prove their damages case pretty convincingly in order to move the defendants to the negotiating table and to get them to settle around such a large number,” said Sean Griffith, an expert in corporate and securities law at Fordham University School of Law, as quoted in a January 4 Wall Street Journal article.

Pomerantz’s achievement is significant not only for the outstanding multi-billion dollar recovery to investors, but also for the precedent-setting decisions achieved during the litigation. Jeremy Lieberman, Co-Managing Partner of Pomerantz, who led the Petrobras litigation, commented:

“We are very pleased with this historic settlement, which represents the largest securities class action settlement in a decade and the largest class action settlement ever involving a foreign issuer. In addition, throughout the course of this litigation, plaintiffs achieved important precedents at the Second Circuit Court of Appeals regarding the ascertainability requirement during class certification, as well as the utility of event studies for establishing predominance in securities class actions. These precedents will form the bedrock of class action jurisprudence in the Second Circuit for decades to come. Simply put, this litigation and its ultimate resolution have yielded an excellent result for the Class.”

Defendants had appealed the District Court’s opinion certifying classes of both purchasers of Petrobras equity and debt on multiple grounds, including for failure to satisfy the requirement of ascertainability and for failure to satisfy the burden of showing that the Petrobras securities traded in efficient markets. The Second Circuit accepted the appeal and, in an issue of first impression, squarely rejected defendants’ invitation to adopt the heightened ascertainability requirement promulgated by the U.S. Court of Appeals for the Third Circuit, which would have required plaintiffs to demonstrate that determining membership in a class is “administratively feasible.”

The Second Circuit also refused to adopt a requirement, urged by defendants, that all securities class action plaintiffs seeking class certification prove through direct evidence (i.e., via an event study) that the prices of the relevant securities moved in a particular direction in response to new information. The Second Circuit rejected the notion that complicated event studies should be submitted by plaintiffs at the class certification stage, agreeing with plaintiffs that “event studies offer the seductive promise of hard numbers and dispassionate truth, but methodological constraints limit their utility in the context of single-firm analyses.”

The impact of the precedent set by Petrobras was demonstrated when the Second Circuit handed another significant win to plaintiffs in Strougo v. Barclays PLC – another case where Pomerantz serves as sole lead counsel – where, building on its decision in Petrobras, it held that “direct evidence of price impact . . . is not always necessary to establish market efficiency and invoke the Basic presumption” of reliance. Importantly, the Second Circuit also held that defendants seeking to rebut the presumption of reliance must do so by a preponderance of the evidence rather than merely meeting a burden of production.

Pomerantz Partner, Jennifer Pafiti, commented on the role of the lead plaintiff in Petrobras:

“Universities Superannuation Scheme, the largest private pension fund in the United Kingdom, diligently prosecuted this case as lead plaintiff to assist in securing a fantastic recovery for defrauded investors as well as achieving some key legal rulings along the way. The settlement serves as a reminder to companies, both foreign and domestic, that raise money by issuing stock on a U.S. exchange that, when it comes to corporate misconduct, their investors will be afforded the protection provided by the United States’ robust anti-securities fraud laws.”

Pomerantz Managing Partner Jeremy A. Lieberman led the litigation assisted by Partners Marc I. Gross, Jennifer Pafiti, and Emma Gilmore; and Of Counsel, John A. Kehoe and Brenda Szydlo.