In re Eletrobras Securities Litigation
245 F. Supp. 3d 450
| S.D.N.Y. | 2017Background
- Securities class action on behalf of purchasers of Eletrobras U.S.-listed ADSs (Aug 17, 2010–Jun 24, 2015); plaintiffs: City of Providence and Dominique Lavoie.
- Defendants: Eletrobras and senior officers Lopes (short-tenure CEO), Carvalho (CEO after Feb 2011), Araújo (CFO/Head of IR), and Cardeal (Chief Generation Officer; not yet served).
- Plaintiffs allege repeated public assurances about Eletrobras’s ethics, controls, and governance while an internal bribery/bid‑rigging scheme (revealed by Operation Car Wash) led to later disclosures and write‑offs in 2014–2015.
- Eletrobras’s 2014–2015 20‑F disclosures described an internal investigation finding illicit payments, overpricing, criminal charges against former officers, board/management replacement, and R$ write‑offs.
- Claims: (1) Section 10(b)/Rule 10b‑5 misstatements/omissions against Eletrobras, Lopes, Carvalho, Araújo; (2) Rule 10b‑5(a)/(c) scheme liability against all defendants; (3) Section 20(a) control‑person liability against the individual defendants.
- Motion to dismiss: Eletrobras, Lopes, Carvalho, Araújo seek dismissal under Fed. R. Civ. P. 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Class standing to represent bondholders | ADS purchasers were injured by company disclosures that impacted all securities | ADS and bondholders are too different to permit common class standing | Named ADS purchasers have class standing to represent bondholders (class standing upheld) |
| Actionable statements about ethics/integrity | Repeated public assurances about ethics and controls were made to rebut bribery reports and were material and misleading | Statements were general puffery and not actionable | Statements were plausibly material and not mere puffery; allegations survive dismissal as to Eletrobras, Carvalho, Araújo (but not Lopes) |
| Materiality of financial disclosures (PP&E/write‑offs) | Concealment of illicit payments and later write‑offs were qualitatively material despite small quantitative percentage | Illicit amounts were quantitatively immaterial (tiny % of assets) | Qualitative factors (concealment, criminal exposure, centrality to business, market reaction) make materiality plausible at pleading stage |
| Scienter for individual and corporate defendants | Senior officers knew of internal control deficiencies, SPE risks, audits, and nonetheless certified reports; Cardeal directly participated in scheme | Defendant officers lacked particularized facts showing knowledge; adverse‑interest defense bars imputing Cardeal's scienter to Eletrobras | Strong inference of scienter pled as to Carvalho and Araújo (so corporate scienter imputed); Lopes dismissed for lack of scienter; Cardeal's alleged scheme imputable to Eletrobras; scheme claims dismissed as to Lopes, Carvalho, Araújo but survive as to Eletrobras (via Cardeal) |
Key Cases Cited
- McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184 (2d Cir. 2007) (motion to dismiss standard: accept allegations as true and draw reasonable inferences for plaintiffs)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (plausibility standard for complaints)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (legal conclusions need not be accepted as true on a motion to dismiss)
- ATSI Communications, Inc. v. Shaar Fund, Ltd., 493 F.3d 87 (2d Cir. 2007) (Rule 9(b) pleading elements for securities fraud)
- NECA‑IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012) (class standing standard in securities class actions)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (U.S. 2007) (test for whether pleaded facts give rise to a strong inference of scienter)
- Stoneridge Inv. Partners, LLC v. Scientific‑Atlanta, 552 U.S. 148 (U.S. 2008) (reliance requirement and limits on scheme liability for remote actors)
- ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (puffery doctrine; qualitative materiality factors)
- SAIC, Inc. v. 818 F.3d 85 (2d Cir. 2016) (company assurances about integrity can be actionable when contrasted with revealed fraud and its business significance)
- Litwin v. Blackstone Group, L.P., 634 F.3d 706 (2d Cir. 2011) (holistic materiality analysis and reference to SAB 99 factors)