116 F. Supp. 3d 368
S.D.N.Y.2015Background
- Petrobras, a Brazilian state-controlled oil company with ADSs traded on the NYSE, was alleged to have operated a multi-year bribery/kickback scheme (Operation Lava Jato) in which certain Petrobras executives steered contracts to a cartel that paid kickbacks, inflating contract prices and Petrobras’ reported PP&E and earnings.
- Lead plaintiff Universities Superannuation Scheme Ltd. (USS) filed a consolidated amended complaint asserting Exchange Act (Section 10(b)/20(a)), Securities Act (Sections 11, 12(a)(2), 15) and Brazilian-law claims on behalf of classes of investors; other plaintiffs asserted Securities Act claims without alleging fraud.
- Plaintiffs allege two main categories of misstatements: (1) financial statements that capitalized inflated contract costs (overstating PP&E, understating expenses, overstating net income); and (2) public assurances about corporate integrity and effective internal controls and anti-corruption measures.
- Defendants moved to dismiss on multiple grounds: failure to plead material misrepresentation or scienter under the Exchange Act (and heightened PSLRA/Rule 9(b) standards); various standing, reliance, timing (statute of limitations/repose), and domestic-transaction defects under the Securities Act; and mandatory arbitration of Brazilian-law claims under Petrobras’ bylaws.
- The Court denied dismissal of the Exchange Act claims (finding adequate allegations of materiality and scienter), granted in part and denied in part dismissal of the Securities Act claims (statute-of-repose bar to certain 2012 Note claims, standing/reliance/time pleading defects in others but leave to amend), and dismissed the Brazilian-law claims as subject to mandatory arbitration for Bovespa purchasers but rejected arbitration as to Exchange Act claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Materiality of alleged misstatements in financials | Contracts were materially inflated (up to 20%); improper payments were capitalized, creating potentially large write-downs and market reaction. | Public documents (Costa testimony, Petrobras statements) show bribes were ~3% and possible $1.3B impact — immaterial as a matter of law. | Court: plausible materiality; qualitative factors (concealment of unlawful conduct, centrality of assets, market reaction) defeat dismissal. |
| Scienter for Exchange Act claims | Management knew of procurement corruption and ineffective controls; specific employee reports and cooperating executive testimony support a strong inference of scienter. | Corrupt executives acted for personal/political benefit; adverse-interest exception severs corporate scienter. | Court: scienter adequately pleaded; adverse-interest exception inapplicable because company benefited and political patronage supported corporate motive. |
| Securities Act standing, reliance, statute of repose | Plaintiffs trace purchases to offering documents and claim reliance; discovery rule for limitations. | Plaintiffs can’t trace some notes (reopening), lack direct-purchaser status for Section 12(a)(2), some claims time-barred by 3-year repose, and purchasers bought after earnings statements so lack Section 11 reliance. | Court: plaintiffs have sufficient pleading-level tracing for standing but Section 12(a)(2) direct-purchase standing lacking (leave to amend); 2012 Notes Section 11 claims barred by 3-year repose; claims for notes purchased after earning statements dismissed for lack of reliance; one-year limitations issues left for factual development. |
| Enforceability of Petrobras’ bylaw arbitration clause (Brazilian-law claims) | Plaintiffs: arbitration on bylaws of adhesion or invalid adoption/notice; clause not binding on shareholders for U.S. claims. | Defendants: Brazilian law authorizes bylaws with mandatory arbitration; shareholders who purchased on Bovespa after adoption are bound; clause covers CVM and related disputes. | Court: under Brazilian law the arbitration clause is valid and binding on Bovespa purchasers; Counts III–V dismissed for mandatory arbitration. Court rejects arbitration of Exchange Act claims for U.S. purchasers. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (pleading standard — plausibility requirement)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading standard for plausible claim)
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (standard for evaluating scienter inference)
- Rombach v. Chang, 355 F.3d 164 (Rule 9(b) particularity for securities fraud complaints)
- ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (materiality and SAB No. 99 guidance)
- IBEW Local Union No. 58 Pension Trust Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383 (consideration of public documents on a motion to dismiss)
- Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175 (opinion statements and liability standard)
- City of Pontiac Gen. Employees’ Ret. Sys. v. Lockheed Martin Corp., 875 F.Supp.2d 359 (materiality rarely resolved on pleadings)