In one of the largest U.S. securities class action lawsuit settlements ever, the Brazilian-based energy company Petrobras has agreed to settle the bribery and corruption-related securities class action lawsuit pending against the company in the Southern District of New York for $2.95 billion. The settlement, which is subject to court approval, resolves only the claims of Petrobras investors who purchased the company’s securities in the U.S.; it does not resolve the claims of investors who purchased Petrobras securities in Brazil.  The settlement resolves the case just before the U.S. Supreme Court was to consider whether to take up a cert petition in which the defendants sought to have the high court address class certification issues in the case. The company’s January 3, 2017 press release describing the settlement can be found here. The plaintiffs’ lawyers’ January 3, 2017 press release about the settlement can be found here.



Petróleo Brasileiro S.A. (Petrobras) is a multinational energy company headquartered in Brazil. The Brazilian government is the company’s majority shareholder. The company’s shares trade on the Bovespa, the São Paulo stock exchange, and its sponsored American Depository Shares (ADS) trade on the NYSE. The company has been caught up on a massive investigation of rampant corruption involving the company’s contracts for the construction of production facilities. The corruption allegedly involved a scheme in which several large construction companies formed a cartel to circumvent Petrobras’s competitive bidding process. Executives at Petrobras allegedly received kickbacks to facilitate the scheme. A system of political patronage resulted in the diversion of funds to various political parties in Brazil as well. As a result of the scheme, Petrobras massively overpaid for several refineries.


The corruption scheme was ultimately revealed as part of an investigation by the Brazilian Federal Police known as Operação Lava Jato (“car wash”). Following the public revelation of the details of the scheme, the company’s shares price fell by over 80% and the price of its ADSs fell by 78%.


The U.S. Securities Class Action Lawsuit

As discussed here, in December 2014, investors who had purchased the company’s ADSs on the New York Stock Exchange filed a securities class action lawsuit in the Southern District of New York against the company; certain of its directors and officers; its auditor; and its offering underwriters. The ADS investors asserted claims under both the Securities Exchange Act of 1934 and the Securities Act of 1933. An amended complaint added claims alleging violations of Brazilian securities laws asserted on behalf of investors who had purchased Petrobras securities on the Bovespa.


The plaintiffs assert that in various public statements and regulatory filings, the company had made misrepresentation of two types: with respect to the company’s financial condition and about the state of its business and management. With respect to the company’s financial condition, the plaintiffs essentially allege that the company improperly capitalized the costs associated with the payments to the cartel members. With respect to the company’s business and management, the plaintiffs, among other things, alleged that the company had misrepresented its financial controls and its ethical practices.


The defendants filed motions to dismiss the plaintiffs’ claims. As discussed here, in a July 30, 2015 Opinion (here), Judge Jed Rakoff made three rulings: first, he denied the defendants’ motions to dismiss the plaintiffs’ claims under the ’34 Act; second, he granted in part and denied in part the motions to dismiss the plaintiffs’ claims under the ’33 Act; and third, he granted the defendants’ motions to dismiss the claims asserted under Brazilian law on behalf of investors who purchased their Petrobras shares on the São Paulo Stock Exchange. Judge Rakoff specifically held that the Brazilian securities law claims asserted on behalf of investors who purchased their Petrobras securities on the São Paulo Stock Exchange were subject to mandatory arbitration in Brazil pursuant to the company’s bylaws.


Class Certification Issues and U.S. Supreme Court Proceedings

Since Judge Rakoff’s ruling on the dismissal motion, the U.S. lawsuit has gone forward, with significant dispute regarding class certification issues. The class certification issues made their way all to U.S. Supreme Court in the form a cert petition filed on behalf of defendants. The defendants’ cert petition is discussed in detail here.


As Alison Frankel well-detailed in a December 6, 2017 post on her On the Case blog (here), the defendants’ cert petition sought to have the high court consider the question of what evidence a securities class action plaintiff needs to present in order to invoke the presumption of reliance for purposes of a motion for class certification. (For background regarding the Second Circuit decision Petrobras sought to have the Court review, please see my prior post, here.)


The Supreme Court was scheduled to consider the Petrobras cert petition in conference on January 5, 2017. However, on January 3, 2017, the parties to the case filed with the Supreme Court a Joint Emergency Motion to Defer Consideration of the Petition for Certiorari (here). Among other things, the parties’ joint motion says that the parties had reached a settlement in principle to settle the case on December 31, 2017 and says further that the parties intend to file their submit their settlement agreement to the district court for preliminary approval on or before January 31, 2017.


The Settlement

According to the company’s press release, the parties have agreed to settle the class action lawsuit for Petrobras’s agreement to pay $2.95 billion. The press release states the settlement will be funded in three installments: two installments of $983 million and a third installment of $984 million. The first installment will be paid within 10 days of the court’s preliminary approval of the settlement. The second installment will be paid within 10 days of final approval of the settlement. The third installment will be paid by the later of (i) six months after final approval, or (ii) January 15, 2019.  Petrobras will recognize the total settlement amount in the fourth quarter of 2017. According to the plaintiffs’ lawyer’s press release, the settlement does not resolve claims pending against Petrobras’s outside auditor.


Petrobras emphasized in its press release that the proposed settlement does not constitute any admission of wrongdoing or misconduct by the company, and that in the agreement Petrobras express denies liability. The press release also reiterates the company’s view that it was a “victim” of the acts uncovered in Operation Car Wash. The company has recovered 1.475 billion Reais in restitution and intends to continue to “pursue legal remedies from culpable companies and individuals.”



The Petrobras settlement, if approved, would be the fifth largest U.S. securities class action settlement ever, exceeded only by Enron ($7.2 billion), WorldCom ($6.1 billion), Tyco International ($3.2 billion), and Cendant ($3.2 billion). (A list of the top ten U.S. securities class action lawsuit settlements can be found here. My review of the latest list of the top 100 securities class action lawsuits settlements can be found here.)


The Petrobras settlement is also the largest settlement in that order of magnitude for many years; the other large settlements ahead of Petrobras on the top ten list were all settled several years ago. The only recent settlement anywhere remotely close to the Petrobras settlement in sheer size is the Household International case, which settled in June 2016 for $1.575 billion (although that case settled following trial and after the trial verdict was set aside by the Seventh Circuit).


According to the plaintiffs’ lawyers’ press release, the Petrobras settlement is the largest settlement in a decade. It is also, according to the press release, the largest settlement of a securities class action lawsuit involving a non-U.S. company.


While there have been larger settlements and there have been comparable settlements, the Petrobras settlement is unique in one respect, in that it is the largest settlement of a securities lawsuit filed as a follow-on to bribery or corruption allegations. There have of course been bribery follow-on suits for years, but many of these cases prove to be unsuccessful. There also have been bribery follow-on lawsuit that have settled in the past, but none anywhere near the magnitude of the Petrobras settlement. By my reckoning the largest bribery or corruption follow-on securities lawsuit settlement prior to the Petrobras settlement was the 2015 Avon Products settlement, in which the company agreed to pay $62 million to settle a securities lawsuit involving allegations of bribery in the company’s China operations.


While the recently announced settlement, if approved, would resolve the U.S. class action lawsuit, it would not end the related arbitration proceedings pending against the company in Brazil in the special arbitration chamber of the Sao Paulo Stock Exchange (about which refer here and here). The size of the U.S. settlement clearly will have an impact on the pending Brazilian arbitration proceedings.


Even after the settlement is filed with the Court, U.S. investors will have the opportunity to opt out. Indeed, the Petrobras case had already attracted a number of separate opt-out cases. Indeed, some of these separate opt-out cases were previously settled. According to a January 3, 2017 Bloomberg article (here), Petrobras has already settled more than a dozen of these separate lawsuits. The value of these prior opt-out settlements has not previously been disclosed, but the total value of settlements that Petrobras has paid or agreed to pay in U.S. securities lawsuits relating to the bribery scandal are greater than just the value of the class action settlement. Any future opt-outs from the securities lawsuit settlement could further increase Petrobras’s aggregate settlement costs, although because the opt-out cases frequently are settled confidentially, the total cost may never be known.


In addition to the size of the settlement, the timing of the settlement is also interesting. Obviously, one factor affecting the settlement of the timing was the scheduled January 5 date for the U.S. Supreme Court to take up the question of whether or not to grant cert on the various class certification issues. But there may have been another factor driving the settlement timing.


The parties’ filing with the Supreme Court notifying the Court of the settlement says the settlement in principle was reached on December 31, 2017. The company’s press release says that the company will take the charge for the entire settlement amount in the fourth quarter of 2017, even though the settlement is to be paid in installments over the course of what may be several years. I wonder if the new U.S. tax law came into play here. I don’t know enough about the details of the new tax law to offer anything other than conjecture, but it clearly seems like it was important for the company to have the entire amount of the settlement apply in 2017. Maybe it was some other consideration other than the new tax law, but it certainly does seem as if there were was some accounting or some other consideration driving the timing.


Upcoming PLUS Webinar: On January 4, 2018, I will be moderating a Professional Liability Underwriting Society (PLUS) webinar with the title of “D&O Roundtable: Disruption and the Potential Effects on Organizations.” The free hour-long webinar, which will take place at 11:00 am EST, will include a panel of distinguished speakers: Sara Brody, Partner at Sidley Austin LLP, Jessica Corley, Partner at Alston & Bird LLP, and Bryan Kocon, Business Unit Leader – Public Company Liability at Travelers Insurance. A brief description of the webinar and registration information can be found here.