litfundingI was on a panel at a law firm event last week during which I was asked to make some predictions for 2015. Among other things, I said that I thought we would see an increase of securities class action lawsuit filings following in the wake of regulatory investigations, especially bribery investigations. I also said that many of these lawsuits next year will involve bribery investigations being led by governments other than that of the United States. Well, we not yet into the new year, but there has already been a flurry of activity consistent with my predictions.


First, on November 30, 2014, plaintiff security holders filed a securities class action lawsuit in the Southern District of Texas against Cobalt International Energy, Inc., certain of its directors and officers, certain investment firms that allegedly controlled the company, and its offering underwriters. In their complaint, which can be found here, the plaintiffs allege that the company, which has oil well operations in Angola, “obtained access to its Angolan wells from the Republic of Angola through apparent bribery and by partnering with shell companies in Angola that were partially owned by high-level Angolan officials, putting the company at serious risk of enforcement action” by the DoJ and the SEC. The complaint alleges further that the company misrepresented the value of its wells in Angola after the Company learned that the wells contained very little or no oil.


The complaint further alleges that, in reliance on offering documents allegedly containing these alleged misrepresentations, the company conducted several equity and debt securities offerings between February 2012 and May 2014 involving the sale by the company and selling shareholders of billions of dollars of stock and debt securities. On February 21, 2012, the company disclosed that the SEC was investigating the company for possible FCPA violations with regard to the company’s Angolan operations. On August 5, 2014, the company announced that the SEC had issued the company a Wells Notice stating that the SEC was recommending an enforcement action against the company. An August 5, 2014 Bloomberg article discussing the SEC investigation can be found here.


On August 27, 2014, the company announced that the Angolan government had terminated the partnership interests in Cobalt’s Angolan oil projects of two Angolan companies with whom Cobalt had partnered. On November 4, 2014, the company disclosed that based on testing of one of its Angolan well, which it has previously stated was a “large, well-focused high impact well,” the well contained neither oil nor gas. The plaintiffs allege that as a result of these disclosures about the bribery investigation and about the well the companies share price declined. The plaintiffs seek damages under federal securities laws.


Second, on December 8, 2014, a plaintiff shareholder filed a securities class action in lawsuit in the Southern District of New York against Petroleo Brasileiro, S.A. (“Petrobras”) on behalf of those who purchased the company’s American Depositary Shares on a U.S. exchange during the period May 20, 2010 through November 21, 2014. The complaint, which can be here, alleges that the company made materially “false and misleading statements” by “failing to disclose a multi-year, multi-billion dollar money-laundering and bribery scheme” allegedly taking place at the Company since 2006. The plaintiff’s lawyer’s December 8, 2014 press release describing the lawsuit can be found here.


The corruption and money laundering investigation of Petrobras and its employees and executives by Brazilian officials has been widely reported in the press. For example, as reported a November 14, 2014 Wall Street Journal article entitled “Petrobras Scandal Widens, Earnings Delayed” (here), Brazilian federal police had arrested 18 Petrobras  employees who allegedly  “were part of a bribery and money-laundering scheme that has siphoned hundreds of millions of dollars from the state-owned oil firm into the pockets of employees, contractors and politicians.” The Journal also reported that the investigation, which has been dubbed “Operation Car Wash,” threatens “to upend the second term of recently re-elected President Dilma Rousseff.” The scandal reportedly has also drawn the attention of U.S. investigators as well.


The complaint alleges that the company inflated the value of construction contracts with other large Brazilian companies “for the sole purpose of receiving kickbacks.” The complaint also alleges that the company overstated various items on its balance sheet “because the overstated amounts paid on inflated third-party contracts were carried as assets on the balance sheet.” The complaint alleges that as a result of the publicity surrounding the scandal, the arrest of numerous company employees and executives and of the questions about the company’s financial statements the company’s ADS price declined 46% between September 5, 2014 and November 24, 2014. The plaintiff seeks to recover damages under the U.S. federal securities laws.



The phenomenon of civil litigation following in the wake of a bribery or corruption investigation is nothing new, as I have previously noted on this blog. Just the same, these new lawsuits are interesting, particularly the lawsuit involving Petrobras. Both of them involve allegations of bribery and other misconduct against multinational oil companies, although in connection with operations in different countries.


What is particularly interesting about the Petrobras case is that it represents a securities lawsuit filed against a non-U.S. company based on disclosure surrounding a regulatory investigation outside the United States. As I mentioned at the outset of this blog post, I think we will be seeing more of these kinds of follow on lawsuits in the months ahead. There have already been a number of them this year. For example, as discussed here, in January 2014, Nu Skin Enterprises was hit with a securities class action lawsuit following news of an alleged investigation in China of the company’s allegedly fraudulent sales practices there. Similarly, in June 2014, China Mobile Games and Entertainment Group was hit with a securities class action lawsuit following the news of an anti-bribery investigation in China involving company officials, as discussed here.


While these two cases and the Petrobras case involve lawsuits arising following corruption investigations, there have been other U.S. securities lawsuits filed involving other types of investigations by non-U.S. regulators. For example, as discussed here, Jinko Solar, a U.S.-listed Chinese company, is involved in a U.S. securities class action lawsuit filed in 2011 following in the wake of a Chinese environmental enforcement action.


I think the number of these kinds of cases growing out of non-U.S. regulatory and enforcement actions will only increase. And while the cases I have referenced all involve investigations by each company’s home country regulator, I suspect that in the future we will see cases following on regulatory investigations outside of companies’ home countries. As I discussed in detail here, for many countries, their most significant regulatory risk may be outside of their home country, and as the $489 million penalty that GlaxoSmithKline paid to Chinese regulators earlier this year demonstrates, the foreign country regulatory exposures increasingly are very substantial.


When I first saw the new lawsuit involving Petrobras and involving the company’s huge scandal, it made me think Tesco, the U.K. grocer that is involved in its own scandal in its home country. Both companies are domilciled outside the U.S., but both of them have now been hit by securities lawsuits in the U.S. filed on behalf of plaintiffs who bought their securities in the companies on U.S. exchanges. Because of the Morrison decision, shareholders of the companies who purchased their shares outside the U.S. cannot be a part of the U.S. securities class action. In Tesco’s case, lawyers in the U.K. are now organizing efforts to initiate an action in the U.K. on behalf of shareholders of the company who bought their shares on the London Stock Exchange, as discussed here.


These efforts in the U.K. on behalf of Tesco shareholders makes me wonder – might similar efforts develop in Brazil on behalf of Petrobras shareholders who purchased their shares in the company in Brazil? As I noted in a recent post, Brazil’s laws do provide for a form of class action litigation, and as of the last time I looked into the subject, there were additional reforms to the existing procedures pending. Brazil’s procedures may or may not be suitable as a vehicle for aggrieved Brazilian Petrobas shareholders to seek redress, but enterprising attorneys might seek to try to make what they can out of existing procedures and remedies to try to obtain a recovery for the shareholders. I hope that my Brazilian readers will let me know what they think of the possibility of a civil action in Brazil on behalf of Petrobras shareholders and will  let me know if there are any developments in that regards,


It is also worth noting that in the last few days there has recently been an absolute rash of new U.S. securities lawsuit filings involving non-U.S. company defendants. By my count, of the eleven new securities lawsuits that have been filed since November 24, 2014, eight have involved non-U.S. companies. Overall during the year, and according to my interim tally, there have been 30 securities class action lawsuits filings involving non-U.S. company defendants  (representing about 18% of all lawsuits) out of a YTD total of about 160 lawsuits so far this year, which is roughly comparable to last year’s percentage but well above longer term levels.


One final note. While follow on civil lawsuit often follow in the U.S. after bribery investigations are announced the track record on these kinds of lawsuits arguably is not all that great (refer for example, here and here).