By Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies
“If You Build It, They Will Come”
– Field of Dreams (1989)
Last year Brazil was added to a list of countries for resolving securities fraud claims. Its addition was not voluntary. In the U.S. class action case against Petrobras, the Honorable Judge Rakoff dismissed fraud claims on behalf of the common and preferred shareholders, forcing them to Brazil for arbitration in accordance with company bylaws. Groups of institutions launched rounds of arbitration proceedings, which are ongoing.
Does this signal a broader uptick in Brazilian recovery efforts?
Similar to Petrobras, efforts are being made to organize institutions for arbitration in the wake of a corruption scandal at JBS SA; and last month Vannin Capital said it plans to fund more commercial arbitration matters in that country. Other funders will surely follow. However, it is unknown whether the commercial matters they fund will include securities arbitrations. They aren’t involved in Petrobras or JBS SA.
Conditions are conducive. Funders enable investors to participate on a fully contingent basis and insure against the risk of adverse party (loser pays) cost-shifting. Arbitration proceedings and their outcomes are confidential, so there’s little risk of public disclosure; and parties typically don’t have to provide discovery or participate in person. However, foreign investors may have concerns about impartiality when they sue domestic companies.
Much will depend on the results in Petrobras. Counsel and their clients should be buoyed by the company’s recent efforts to put the scandal behind it. Petrobras has announced a $2.95 billion settlement of the U.S. class action which, if approved by the court, will make it the fifth largest in history. The company previously settled the majority of individual U.S. ‘opt-out’ suits against it.
If the Brazilian arbitrations also yield positive outcomes, the answer should be yes: having built it, the funders will come.
Jurisdiction Risk Profile for Brazil
Given the risks associated with arbitration in Brazil, this jurisdiction is considered medium-high and investors should proceed with caution.
• Costs: Low
• Discovery: Medium
• Anonymity: High
Recent Cases in Brazil
- Petróleo Brasilerio S.A. (Petrobras): An investigation dubbed “Operation Car Wash” by local Brazilian law enforcement authorities alleges that former Petrobras executives falsely inflated the value of construction projects for their own profit and paid kickbacks to politicians. Numerous Petrobras executives, politicians, and contractors have been arrested and jailed, while the revelations of this scandal have caused significant declines in Petrobras’s securities prices and massive investor losses.
- JBS S.A.: Between May 15 and May 22 of 2017, JBS’ stock prices plummeted 45% in response to news that its controlling stockholders had admitted to paying approximately $150 million in bribes to Brazilian politicians to bypass inspections and overlook the processing of rotten meat/operating plants with traces of salmonella. On May 31, 2017, the controlling stockholders agreed to pay about $3.2 billion in fines over a period of 25 years.
- January 2018: Petrobras: What investors can gain from this case (in addition to the $2.9 billion class action settlement)
- February 2018: The Rise of International Claims Filings
U.S. CLAIMS I GLOBAL GROUP LITIGATION I ANTITRUST I LITIGATION MONITORING I BUYOUTS
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