The massive Brazilian corruption scandal that began with an investigation of the state-owned oil company Petrobras and that has since spread both to other industries, including the construction industry, and to other Latin American countries, has now spread to an investigation of unsanitary practices and corruption in Brazil’s meatpacking industry. Among the Brazilian companies caught up in this latest scandal is JBS S.A., which is the world’s largest meat processing company. As has been the case with other companies caught up in Brazilian corruption scandal, JBS, whose Level 1 ADRs trade over-the-counter in the U.S., has now been hit with a follow-on securities class action lawsuit in the United States. This lawsuit is the latest in the string of lawsuits filed against companies from Brazil and elsewhere Latin America that have been hit with U.S. securities suits following news of their involvement in the burgeoning corruption scandal.
On March 17, 2017, Brazilian police raided the facilities of two of the country’s largest meat processing companies, JBS and BRF SA, as well as numerous other small facilities. Among other things, the investigation is reportedly examining whether these companies bribed government officials to approve the sale and export of tainted meat. There are allegations that the target companies sold adulterated meat products. The investigation apparently is part of a long-running investigation known as “Operation Weak Flesh.”
According to news reports, policy arrested three BRF employees and two JBS employees, as well as 20 public officials. In its March 17, 2017 press statement about the raid (here), JBS noted that the Brazilian police operation had not targeted the company’s executives and that the company’s headquarters were not a target of the operation. The news of the investigation and police raid caused the prices of JBS ADR’s to decline.
On March 22, 2017, a JBS investor filed a securities class action lawsuit in the Eastern District of Pennsylvania against JBS, it CEO, and the global head of the company’s operations management team. The complaint, which appears on the court’s electronic docket in four parts, can be found here, here, here, and here. The plaintiff’s lawyers’ March 22, 2017 press release about the lawsuit can be found here.
The complaint recites at length numerous statements in the public filings of JBS about the company’s commitment to food safety, as well as its commitment to ethical business practices. The complaint then alleges (in paragraph 27) that the defendants misrepresented or failed to disclose that:
(1) JBS executives bribed regulators and politicians to subvert meat inspections of its plants and overlook sanitary practices such as processing rotten meat and running plants with traces of salmonella; (2) According to Brazilian authorities, JBS “didn’t care at all about the quality of the meat or food” they sold. “They didn’t care at all about what they were selling to consumers;” (3) Defendants falsified documentation for exports to Europe, China and the Middle East; (4)Defendants arranged bribes and favors for inspectors ranging from political donations and favorable bank loans to small bribes including hams and other meat products; (5) in coordination with government inspectors who Defendants used their direct influence in the Agriculture Ministry to select and whom they had bribed, Defendants’ employees entered government offices, accessed computers and issued their own export certificates; Defendants processing plants suffered from unsanitary practices such as rotten mean and shipping exports with traces of salmonella; (7) Defendants produced sanitary certificates regardless of the adulteration of the products.
The complaint, which purports to be filed on behalf of a class of investors who purchased JBS ADRs over the counter between June 2, 2015 and March 17, 2017. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the ’34 Act.
As I have noted in prior posts on this blog (most recently here), as the Brazilian corruption scandal has spread, a number of the Brazilian companies caught up in the investigation have been sued in securities class action lawsuits in the U.S. This phenomenon of the filing of follow-on securities lawsuits against companies involved in the investigation recently spread to a company from Peru that has become involved in the investigation of corruption in the Brazilian construction industry.
JBS is the first of the company’s caught up in the Brazilian meatpacking industry scandal to be hit with a U.S. securities suit. However, it may not be the last. BRF, the other large Brazilian meat industry company caught up in the investigation, has ADRs that trade on the NYSE. The possibility that BRF too could be hit with a follow-on U.S. securities lawsuit seems not unexpected.
As the Brazilian corruption investigation continues to spread, it seems likely that companies in other industries could also face scrutiny or even possible future investigative involvement. This possibility not only presents the possibility for further U.S. securities lawsuit filings against Brazilian companies whose securities trade in the U.S. The possible civil follow-on litigation is not limited just to companies that have securities trading on the U.S. exchanges. Petrobras, for example, faces a number of group arbitration actions in Brazil based on the corruption scandal. The point is that these companies caught up in these kinds of investigations could face litigation exposures in their home countries, even if they do not face litigation exposures in the U.S.
Given the recent U.S. lawsuit filed against a Peruvian company caught up in the Brazilian scandal, these future claims possibilities are not limited just to Brazilian companies, but also include other Latin American companies. Nor are these exposures limited just to Latin America; to cite but two recent examples (there are many others), authorities in South Korea and Romania have recently initiated anti-corruption initiatives. As regulators step up their efforts to combat corruption in their respective countries, the possible outcomes include not only the prospect for high-profile bribery investigations, but also the same kind of follow-on civil litigation that has hit a number of the companies caught up in the Brazilian anti-corruption investigation.
One interesting question that the JBS lawsuit presents and that likely will arise regarding other companies involved in the corruption scandal is whether or not, based on the principles the U.S. Supreme Court enunciated in Morrison v. National Australia Bank, the company or companies are subject to the U.S. securities laws. Specifically, there is a recurring question of whether or not having Level 1 ADRs trading over-the-counter is a sufficient basis for a company to be held subject to U.S. securities laws.
An ADR is a U.S. dollar denominated form of equity ownership that represents foreign shares of the company held by a custodian bank in the company’s home country. According to the complaint, JBS’s ADRs are sponsored Level 1 ADRs. Unlike Level 2 ADRs, which may trade on U.S exchanges, or Level 3 ADRs, which permit a non-U.S. company to raise capital in the U.S., Level 1 ADRs may not trade on U.S. exchanges and entail minimal U.S. reporting requirements. (Refer here for further background on the difference between the various ADR levels).
Courts have reached divergent opinions with respect to Level 1 ADRs, based on whether or not the ADRs are sponsored. For example, in the May 2016 decision in the Toshiba case specifically held that transactions in unsponsored ADRs purchased OTC in the U.S. are not sufficient to satisfy Morrison’s requirements. By contrast, in January 2017 (and as discussed here), Northern District of California Judge Charles R. Breyer held that the U.S. securities laws do apply to over-the-counter transactions in the U.S. of Volkswagen’s sponsored Level 1 ADRs. Questions remain on these issues, but the plaintiff in the JBS case seems likely to try to rely on the Court’s holding in the Volkswagen case that because the U.S. securities laws apply to transactions in JBS ADRs because the securities are sponsored.
One final note about the JBS case is that it seems to represent yet another phenomenon on which I have commented on this blog, which is the prevalence of U.S. securities class action litigation involving companies domiciled outside the U.S. As I noted in my year-end review of 2016 securities class action litigation, one of the factors driving the increase in U.S. securities litigation lawsuit filings during the year was the elevated frequency of securities suit filings involving non-U.S. companies. As the JBS case itself exemplifies, the filing of U.S. securities litigation against non-U.S. companies has continued in the U.S.
Just to put this activity against non-U.S. companies into statistical context, of the 74 non-merger related securities class action lawsuits filed year-to-date so far in 2017 (through March 22, 2017), 17 of them have involved non-U.S. companies, representing about 23% of all filings. Since non-U.S. companies represent only about 16% of U.S. listed companies, the frequency of lawsuits against non-U.S. companies is and remains disproportionately higher than for domestic U.S. companies listed on U.S. exchanges.
Class Actions in Australia: Among countries outside the U.S., among countries with class action regimes, Australia is one of the most active. 2017 marks the 25th anniversary of Australia’s class action regime. A March 2017 paper from the Jones Day law firm entitled “Class Actions in Australia: 2016 in Review” (here) takes a comprehensive look at the current state of class actions in Australia, concluding with respect to the year just passed that “while the year provided examples of some of the major wins for defendants, a number of key court rulings and statutory reforms have set the stage for more and larger class actions in the year ahead and beyond.” The suggestion of the possibility of greater Australian class action activity is consistent with earlier posts on this blog (for example, here).
The law firm paper discusses a number of important class action case law developments in Australia during 2016, including in particular the decision of the Full Court of the Federal Court in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited  FCAFC 148, which for the first time permitted a common fund order (that is, allowing a litigation funder to be paid from any fund created as a result of a successful class action settlement or judgment).
The paper also reports that there were at least 25 new class actions filed in Australia in 2016, including 12 new class cations filed on behalf of investors. There were at least five investor class action settlements in Australia in 2016, the details of which are also detailed in the report.
D&O in South Africa: A March 22, 2017 Biznews.com article entitled “D&O Liability: Is Corporate South Africa Ignoring the Issue?” (here) takes a look at the state of D&O in South Africa. The article notes that while there is a great take up of D&O among companies whose shares trade the Johannesburg Stock Exchange (JSE), that take up among other companies, particularly small and medium enterprises (SME). In the past ten years, the article note, D&O claims against smaller enterprises are increasing but, according to the article “70% of SMEs do not have adequate D&O cover.”
The D&O claims environment in South Africa has evolved as, among other things, changes has been introduced to the Companies Act (effective in 2011), and as other claims have emerged. In particular the article notes that a director of Blue Platinum Ventures was held personally liable because the company did not adhere to environmental regulations. It was, the article notes, the “first example of a director held liable on the African Continent for not adhering to environmental regulations.” The implications are that there is likely to be a much more active claims environment in the future.
Further details about the Blue Platinum Ventures environmental liability claim can be found here.