In an earlier post, I noted that a significant factor driving securities litigation filings so far this year has been the rising number of U.S. securities lawsuits involving non-U.S. companies. A number of different factors are contributing to the filing of these suits, but among the factors is the increasing numbers of U.S.-listed non-U.S. companies that have been caught up in corruption investigations in their home countries.
The highest profile company among the firms involved in corruption probes is the Brazilian petroleum company, Petrobras, which has been the target of growing Operação Lava Jato (Operation Car Wash) corruption investigation in Brazil. Petrobras, whose ADSs trade on the NYSE, was hit with a class action securities lawsuit in the U.S. in December 2014 (as discussed here).
The continuing Petrobras investigation has spread to a number of other Brazilian companies. Among other things, the investigation has led to the recent arrests of two high profile executives in the construction industry in Brazil, as discussed here. The leaders of the nation’s two largest engineering and construction companies, Marcelo Odebrecht, head of Odebrecht SA, and Otavio Marques Azevedo, head of Andrade Gutierrez, were taken into custody in raids linked to the Petrobras scandal.
The investigation has now led to yet another U.S. securities class action lawsuit against yet another Brazilian company. On July 1, 2015, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Braskem, S.A. and certain of its directors and officers. Braskem, which is based in Brazil, is Latin America’s largest petrochemical company.
According to the plaintiffs’ lawyers’ July 1, 2015 press release (here), the Complaint (which can be found here) relates to March 2015 story in the a São Paulo newspaper, Folha de S. Paolo, implicating Braskem in the Petrobras corruption scandal. The newspaper reported that “according to testimony made by former Petrobras executive Paulo Roberto Costa and self-confessed money launderer Alberto Youssef, Braskem paid at least $5 million annually to Petrobras between 2006 and 2012. The payments were made to acquire crude derivative contracts like propylene and naphtha at cheaper prices.” As the complaint puts it, “Braskem paid bribes to buy cheaper raw material from Petrobras between 2006 and 2012.” The complaint alleges that the company’s share price fell sharply on this news.
The complaint alleges further that Braskem’s largest shareholders are Petrobras itself, the Brazilian Development Bank, and Oderbrecht S.A. (one of the construction companies implicated in the Petrobras scandal and whose CEO was recently arrested).
The complaint alleges that between June 1, 2010 and March 11, 2015 the defendants made materially false and misleading statements regarding the company’s business, operational and compliance policies and made false and misleading statements regarding the effectiveness of Braskem’s internal controls and procedures. The complaint is filed on behalf of investors who purchased the company’s American Depositary Shares between June 1, 2010 and March 11, 2015.
The lawsuit against Braskem is just the latest U.S. securities suit against a U.S.-listed Latin American company caught up in a corruption investigation in its home country. As discussed here, In addition to Petrobras, Chemical & Mining Company of Chile, Inc. (Sociedad Quimica y Minera de Chile, S.A, or SQM), was hit in March 2015 with a securities class action lawsuit relating to the company’s involvement in the to the ongoing corruption and tax evasion scandal involving the Chilean financial services firm, Banco Penta.
These lawsuits, in turn, follow after the securities class action lawsuit filed in April 2013 against Wal-Mart de Mexico SAB De CV (“Walmex”) and certain of its directors and officers, in the face of corruption allegations involving its operations in Mexico. The securities complaint quoted extensively from news reports that the company had falsified its financial records in order to conceal its widespread bribery activities. Walmex’s American Depositary Receipts trade on the New York Stock Exchange. (A separate action previously had been filed against Walmart Stores, Walmex’s U.S. parent, as discussed here).
The phenomenon of civil litigation following in the wake of a corruption investigation is nothing new, at least in the U.S. What is different about these various lawsuits, including the new lawsuit against Braskem, is that they involve non-U.S. companies sued in a U.S. securities class action lawsuit in connection with bribery or corruption activities and investigations in their home countries, by their home countries’ regulators or prosecutors.
As I noted in a prior post, in recent months there has been a series of securities lawsuits filed in the U.S. against non-U.S. companies in connection with regulatory investigations in the companies’ home countries. For example, as discussed here, in January 2014, NuSkin Enterprises was hit with a securities class action lawsuit following news of an investigation in China of the company’s allegedly fraudulent sales practices there. In June 2014, China Mobile Games and Entertainment was hit was a U.S. securities class action lawsuit following news of a bribery investigation in China involving company officials.
As regulators in Latin America and around the world become increasingly more active, it not only become increasingly more likely that companies elsewhere could become involved in regulatory or even criminal investigations, but also, at least where the companies have securities trading on U.S. exchanges, increasingly more likely to become involved in a U.S. securities class action lawsuit.
The more interesting question is whether these developments will lead to claims against companies and their executives in their home countries. The claimants who purchased shares in these companies on U.S. exchanges can pursue claims in U.S. courts under the U.S. securities laws, but investors that purchased shares outside the U.S. do not have that option. This creates the ironic possibility that the U.S.-exchange purchasers could obtain compensation for their losses but the shareholders in the company’s home countries might to empty handed (or even worse see the value of their remaining holdings in the company lose value as the company’s cash resources go to fund settlements with the U.S. investors – a topic discussed here with specific reference to Brazil). These kinds of prospects raise the question whether investors in these other countries may push for legal reforms to allow them to pursue remedies in their home countries’ courts.
While the outcome of these kinds of questions remains to be seen, the developments in Brazil are already having an impact on the domestic D&O insurance marketplace. As I learned in my recent visit to São Paulo, the ongoing Petrobras scandal and uncertainty about where it might lead has roiled the marketplace and provoked significant caution from the D&O underwriters. The local (and locally active) carriers are tightening terms and conditions and seeking pricing increases. Even more difficult than the more restrictive marketplace conditions is the overall uncertainty. There are general concerns about what might be next. The resulting uncertainty creates very challenging conditions for the local D&O insurance professionals and the companies they must advise.
Brazil is of course not the only country cracking down on corruption. China, Australia, Canada, Italy, South Korea and numerous other countries (including, as mentioned above, Chile) have stepped up their corruption enforcement. Increasingly, enforcement authorities are cooperating and collaborating cross-border as well. These activities create operational uncertainty for companies in these jurisdictions. They also create challenges for the local D&O insurance professionals as well.
For a recent post discussing the contrarian position that anti-corruption enforcement may have gone too far, refer here.
Break in the Action: Due to out of office travel commitments, the D&O Diary’s usual publication schedule will be disrupted for the next several days. The standard publication schedule will resume upon my return to the office.