Problems at Petrobras as investors seek damages

Problems for Petrobras, the Brazilian oil company embroiled in what is believed to be the biggest corruption scandal in the country's history, show no sign of abating.

In the past two weeks it has emerged that several large institutional investors, including Dimensional Fund Advisors, the US fund house, and six New York City pension funds, are independently suing Petrobras for losses suffered as a result of corporate embezzlement alleged to have taken place at the company since 2004.

AP1, the $30bn Swedish government pension scheme, also confirmed to FTfm that it will take legal action against the state-owned oil company, which was once considered the pride of Brazil.

The company has suffered a sudden fall from grace. Allegations took hold last year that former directors conspired with politicians, mostly from the ruling coalition led by President Dilma Rousseff, and private-sector contractors to funnel billions of dollars out of the company.

About 40 executives from Brazil's largest construction companies and former Petrobras directors have been arrested in recent months as a result. In March, the heads of Brazil's two houses of Congress, former ministers and an ex-president were named by Brazil's supreme court in a list of 54 individuals who will be investigated in relation to the allegations.

The investor suits claim that the company misstated the value of its assets and made misleading statements about its anti-corruption policies and internal financial reporting controls.

Petrobras stock was consequently sold at artificially inflated prices, according to the legal filings, which claim that the multibillion-dollar bribery scheme is largely to blame for a 43 per cent drop in the company's share price last year.

The lawsuits filed in the New York court system are a fresh blow to Petrobras, against which a number of class action lawsuits have been filed since December. Last month the claims were consolidated into one group class action with the Universities Superannuation Scheme, the £40bn UK pension fund, selected as the lead plaintiff.

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Claudinor Roberto Barbiero, co-ordinator of the law course at the Mackenzie Presbyterian University Campinas in Sao Paulo, describes the class action suit as unprecedented in Brazilian legal history.

"I have been lawyering for 40 years and I have never been acquainted with a case of such magnitude," he says. "You might sometimes see this type of case involving individuals, but not a multinational company."

It is not just the Brazilian company that is in the line of fire. Pomerantz, the law firm representing USS, amended the class action lawsuit last week to name US accounting firm PwC, Petrobras' auditor since 2012, as a defendant for the first time. Several former executives are also named as individual defendants.

The New York City pension funds named several of the banks that underwrote the oil company's securities in 2013 and 2014 as co-defendants in their claim.

Jeremy Lieberman, partner at Pomerantz, said in a statement: "The complaint alleges an unprecedented bribery and money laundering scheme that pervaded every corner of Petrobras.

"It is inconceivable that the company's senior executives, directors and auditor were unaware of the nature of the misrepresentations made to unsuspecting investors."

A spokesperson for PwC Brazil says: "We have not been served with any complaint, and do not believe there is any basis for a complaint."

Investors are spreading the net wide in their attempt to recoup losses. By January, Brazilian prosecutors identified $800m had been stolen from the company, but the final amount could amount to $10bn, according to Andre Gordon, vice-president of Amec, the Brazilian shareholder association, and founder of GTI, the Sao Paulo-based asset manager.

His estimate is based on the court testimony of several former Petrobras directors, who claimed that roughly 3 per cent was skimmed off the company's contracts over a 10-year period.

The class action lawsuit estimates the bribery scheme may have diverted up to $28bn from the company's coffers.

Petrobras stated in January that it was unable to calculate how much might have been stolen.

The fact that institutional investors are choosing to opt out of the class action suit and pursue their own claims is a sign of their confidence that the potential rewards outweigh the financial risks of funding a lawsuit, according to several legal experts. The additional claims could also mean greater financial damage for Petrobras.

John Coffee, professor of law at Columbia Law School, says: "Large institutional investors are increasingly opting out of the class [action] because they do better settling on an individual basis."

Petrobras has not yet filed to dismiss any of the lawsuits, although it is widely expected to do so within the next two weeks. The company and its law firm, Cleary Gottlieb Steen & Hamilton, declined to comment.

The consensus among several legal experts is that a multiyear court battle awaits. Mr Coffee says: "Petrobras is deeply mired in a scandal and that makes it less likely that it can obtain a quick dismissal. If it is not dismissed, settlement will probably follow, but not for three or four more years in a large case like this."

If Petrobras previously asserted that it had adequate financial controls in place when it sold bonds and stock to investors in the US, then the investors behind the lawsuits could have a "reasonable" claim, according to Sam Aguirre, senior managing director of corporate finance at FTI Consulting, the business advisory firm, in Sao Paulo.

He adds that investors might need to consider shifting the case to Brazil, where the oil company has the majority of its assets, although he warns that "claiming against a quasi-sovereign would be a very complicated litigation in Brazil".

While the lawsuits travel through the courts and the corruption investigation continues, investors are unlikely to rush back into buying the stock, according to Nick Butler, visiting professor at King's College London and former vice-president for policy at BP, the UK energy company.

Large institutions including BlackRock and Aberdeen have been among the biggest sellers of the company in recent months, according to FT news service FundFire.

Mr Butler says: "I think the plaintiffs have a very strong case. The investor relations statements from the company over several years have clearly been misleading.

"The Brazilian government is clearly up to its neck in the corruption that has occurred. Anyone buying [Petrobras stock] is taking a big risk."

. . .

March 2014: Former Petrobras director Paulo Roberto Costa is arrested in connection with an investigation into alleged corruption at the company from 2004 to 2012.

April 2014: Brazil's Supreme Court authorises a request for a congressional inquiry into the allegations at Petrobras.

September 2014: After striking a plea bargain with the authorities, Mr Costa names parliamentarians and other officials involved.

October 2014: PwC, Petrobras's external auditor, refuses to sign off on the company's quarterly results.

November 2014: Police in six states raid Petrobras offices and those of some contractors.

FT reveals the US Securities and Exchange Commission and Department of Justice are investigating the Petrobras scandal.

January 2015: Petrobras admits it is unable to calculate how much was stolen in the corruption scandal when it publishes its unaudited financial results. Some analysts had expected writedowns of up to $20bn.

February 2015: Petrobras chief executive Maria das Gracas Silva Foster and five other executives resign.

March 2015: Top politicians are named by Brazil's Supreme Court in a list of 54 individuals who will be investigated.

Petrobras angers investors after appointing a staunch government ally, Luciano Coutinho, as its new chairman.

New investor lawsuits seeking damages from the company are filed, while a class-action suit is consolidated.

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