The massive Petrobras bribery scandal has long since spread beyond just the Brazilian petroleum company itself to encompass a number of different other companies. As I have previously noted on this blog, many of the Brazilian companies caught up in these investigations have been hit with securities class action lawsuits in the U.S. Among the companies caught up in the growing anti-corruption scandal is the Brazilian-based multinational construction company, Odebrecht. Investigations based on the Odebrecht scandal having now spread to companies in other Latin American countries, including, among others, Peru. As discussed below, plaintiffs’ lawyers have now filed a U.S. securities class action lawsuit against one of the Peruvian companies caught up in the Odebrecht scandal, showing that the potential fallout from the corruption investigation that began in Brazil now represents a significant liability risk exposure for companies and their executives throughout Latin America.
Odebrecht, S.A. is a Brazilian-based holding company. Among its primary operating divisions is Norberto Oderbrecht, S.A., a multinational construction company. Odebrecht also controls Braskem, a multinational petrochemical company. In March 2016, Marcelo Odebrecht, Odebrecht’s former CEO, was sentenced to over 19 years in jail for paying bribes to Petrobras. In December 2016, Odebrecht and Braskem agreed to pay at least $3.5 billion to resolve charges with authorities in the United States, Brazil, and Switzerland arising out of their schemes to pay hundreds of millions of dollars in bribes to government officials around the world.
The Odebrecht scandal has now begun to spread to the rest of Latin America, where, according to news reports, Odebrecht had numerous contracts to build huge public infrastructure projects in 10 countries from Argentina to Mexico. Among the countries to which the scandal spread is Peru, whose former President Alejandro Toledo was caught up in the investigation. The criminal information that was filed in connection with Odebrecht and Braskem’s December 2016 plea agreement alleged, among other things, that between 2005 and 2014 Odebrecht paid approximately $29 million in bribes to Peruvian government officials to secure public works contracts.
On February 24, 2017, Reuters published a news report suggesting that the Peruvian construction company Graña y Montero, S.A.A. knew about $20 million in bribes paid to the former Peruvian President, Toledo, by a division of Odebrecht, in connection with a Peruvian highway project in which the Odebrecht division and the Peruvian company were partners. On February 28, 2017, Reuters reported further that three top executives of the Graña y Montero firm were stepping down, after the company’s share price had declined over 50 percent following the news about the company’s possible involvement in the scandal.
The Graña y Montero Securities Suit
On February 27, 2017, plaintiffs’ lawyers issued a press release stating that they had filed a securities class action lawsuit in the Eastern District of New York against Graña y Montero, its CEO, and its CFO. According to the press release, the complaint (a copy of which can be found here), alleges that the defendants
made false and/or misleading statements and/or failed to disclose that: (1) Graña y Montero was aware that its Brazilian partner Odebrecht S.A. paid bribes to former Peruvian President Alejandro Toledo to win construction work on a road traveling from Peru to Brazil; and (2) as a result, defendants’ statements about Graña y Montero’s business, operations and prospects were materially false and misleading and/or lacked a reasonable basis at all relevant times.
The complaint purports to be filed on behalf of all persons who purchased the company’s American Depositary Shares (ADSs) on the New York Stock Exchange between April 30, 2014 and February 24, 2017. The complaint alleges, among other things, that throughout the class period, the company in its periodic filings with the SEC, asserted that it “abide[s] by the highest corporate governance standards in Peru.” The complaint asserts claims under Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder, as well as claims against the individual defendants under Section 20(a) of the Securities Exchange Act.
As I noted above and in prior posts, as the Petrobras scandal spread to other Brazilian companies, a number of those companies whose securities trade on U.S. securities exchanges have been hit with U.S. securities class action lawsuits. Among other companies that have been hit with these bribery scandal-related follow-on securities suits is Braskem, as discussed here. (Odebrecht itself is privately held and has not been hit with a U.S. securities suit.)
As the burgeoning Brazilian bribery investigation has spread outside of Brazil, companies in other countries are getting caught up in the investigation. As the securities suit filed against the Grana y Montero firm demonstrates, to the extent these companies have securities trading on the U.S. exchanges, these other Latin American companies face the possibility of the same kind of U.S. securities class action lawsuit that have already been filed against the various Brazilian companies.
To be sure, there have previously been securities class action lawsuits filed in the U.S. against Latin American companies based in countries other than Brazil that faced their own corruption allegations, independent of the Brazilian-based bribery investigation. For example, as discussed here, 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 ongoing corruption and tax evasion scandal involving the Chilean financial services firm, Banco Penta.
The spread of the Brazilian anti-corruption investigation to companies in other Latin American countries suggests that companies in these other countries now fact the kind of investigative exposure – and follow-on civil litigation exposure – that has already hit a number of Brazilian companies. The Brazilian developments have already roiled the market for D&O insurance in Brazil, as insurers operating in the country struggle to assess how broadly the investigative exposure extends and what its implications may be for future claims and losses. In light of the spread of the Brazilian investigation, other Latin American countries may face the same kind of exposure, and the same kind of D&O insurance marketplace disruption.
Nor are these exposures and potential effects limited to just Latin American countries. Regulatory authorities in a number of countries, including outside of the Latin American region, have also recently stepped up their anticorruption enforcement efforts. 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.
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.
In other words, regulators’ growing willingness to take on corruption in their respective countries has several very significant implications for the companies involved – and for their D&O insurers. The growing prosecutorial willingness to seek to pursue anti-corruption investigation has very significant implications for the D&O insurance marketplace, in Latin America and throughout the rest of the world as well.
More 2016 U.S. Securities Litigation Statistics: Readers who attended the February 2017 PLUS D&O Symposium in New York will undoubtedly recall that in the session’s final panel, addressing securities litigation trends, Priya Cherian Huskins of the Woodruff Sawyer firm had a number of very helpful and interesting statistical observations about 2016 securities class action litigation filings trends in the U.S. Priya has now published her statistics on the Woodruff Sawyer website. In a February 14, 2017 post on her firm’s D&O Notebook blog (here), Priya provides a helpful overview of filing statistics. The firm’s complete report on the 2016 securities suit filings statistics, entitled “Databox Year-End Securities Class Action Report,” can be found here. Priya’s blog post and the report both have a number of interesting observations and both are worth reading at length and in full.