413 F.Supp.3d 187
S.D.N.Y.2019Background
- Plaintiffs are institutional purchasers of Odebrecht Finance Ltd. notes, which were guaranteed by Construtora Norberto Odebrecht (CNO) and Odebrecht Engenharia e Construção (OEC); values fell after revelations of a widespread Odebrecht bribery scheme.
- Plaintiffs allege CNO concealed a multi‑billion dollar bribery/kickback scheme, causing CNO’s financial statements and offering memoranda to violate Brazilian GAAP and to contain material misstatements/omissions about revenues, costs, political‑risk management, and credit strength.
- TAC adds detailed allegations of escalating bribe payments (2006–2014), specific illicit payments (e.g., a $23M 2010 payment), and a shadow accounting system used to hide payments from CNO financials.
- Plaintiffs allege OEC became CNO’s successor (de facto merger/continuation) after 2014–15 restructuring; OSA (parent) allegedly controlled CNO and participated in concealment and investor communications.
- Procedural posture: court previously dismissed many claims with leave to replead; this Memorandum Opinion addresses defendants’ motion to dismiss the third amended complaint and grants/denies relief in part.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether CNO’s financial statements/offering memoranda contained actionable misstatements/omissions (GAAP violations; revenue, costs, political‑risk, financial strength) | CNO violated Brazilian GAAP (failed to disclose contingent liabilities, failed to segregate illicit revenue, failed to expense bribes) and omitted that its success depended on bribery, rendering offering memoranda misleading. | Defendants say Plaintiffs fail to plead GAAP violations with required particularity and that many statements are inactionable puffery or accurate historical facts. | Court: Plaintiffs plausibly pleaded GAAP violations and actionable omissions re: financial statements, political‑risk management, and financial strength; those claims survive. Puffery and historical‑fact statements (e.g., some OSA statements) are inactionable and abandoned. |
| Loss causation for securities claims (did plaintiffs link misstatements to their losses) | Market losses flowed from the materialization of concealed risks—auditors refusing to certify and rating downgrades caused bonds to fall; these were foreseeable consequences of false reporting. | Defendants contend corrective disclosures (2015 press reports) revealed the same facts and did not supply new information about CNO; thus loss causation is not pleaded. | Court: Plaintiffs adequately plead loss causation via materialization of the concealed risks (audit withholding/delayed filings and rating downgrades) and survive dismissal. |
| Successor liability of OEC for CNO’s liabilities (de facto merger / mere continuation / fraudulent transfer) | OEC absorbed CNO’s business: same personnel, address, projects; CNO became an empty shell; OEC assumed guarantees and operations—so OEC is successor liable. | Defendants argue plaintiffs fail to allege asset transfer or the elements of a de facto merger/continuity with sufficient specificity. | Court: Under Rule 8 liberal pleading standard, Plaintiffs sufficiently allege de facto merger / mere continuation facts to survive dismissal on successor‑liability theory. |
| Personal jurisdiction over OSA and Section 20(a) control‑person liability | OSA (parent) directed road shows and investor relations to U.S. markets and controlled CNO; OSA participated in concealment, so (a) jurisdiction exists and (b) OSA is liable as control person. | Defendants challenge personal jurisdiction and argue many OSA statements are inactionable puffery; contest culpable participation for control‑person claim. | Court: Specific jurisdiction over OSA exists on the federal securities claims; most direct claims against OSA dismissed as inactionable/abandoned, but Section 20(a) claims survive because Plaintiffs plausibly allege OSA’s control and culpable participation. |
| State‑law claims (fraud/negligent misrepresentation, conspiracy, NY Debtor & Creditor fraudulent conveyance) | Plaintiffs allege reliance on specific CNO disclosures and particular purchases; conspiracy and fraudulent conveyance also pleaded. | Defendants say reliance not pleaded with specificity (earlier dismissal), conspiracy allegations are conclusory, and fraudulent conveyance lacks standing because Odebrecht Finance is not a defendant. | Court: Fraud and negligent misrepresentation survive (reliance now pleaded); conspiracy dismissed for failure to plead agreement; NY Debtor & Creditor fraudulent conveyance dismissed for lack of standing. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must allege factual matter sufficient to state a plausible claim).
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility standard for Rule 8).
- Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) (omissions/half‑truths can be actionable when they render statements misleading).
- Basic Inc. v. Levinson, 485 U.S. 224 (1988) (materiality measured by effect on the ‘total mix’ of information).
- Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005) (loss causation: risk must be within the zone of risk concealed).
- In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501 (2d Cir. 2010) (materialization‑of‑risk theory for loss causation).
- ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (documents considered on Rule 12 and Rule 9(b) particularity requirements).
- Int’l Shoe Co. v. Washington, 326 U.S. 310 (1945) (minimum contacts test for personal jurisdiction).
- Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985) (reasonableness factors in asserting jurisdiction).