By Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies
Starting the New Year with a bang, on January 3, Petrobras, the Brazilian state-controlled oil company, announced it will pay $2.9 billion to settle the U.S. securities class action against it. If approved, this settlement will be among the largest to date. While impressive, the knowledge that investors gain from seeing how Petrobras resolves the remaining shareholder claims may prove more valuable than the dollars received in this settlement.
The Petrobras scandal illustrates the current balkanization of shareholder litigation against non-U.S. issuers. In the U.S., institutional investors pursued claims for losses in American Depository Receipts (ADRs) traded on the U.S. exchange. (The federal court dismissed claims brought on behalf of investors in Petrobras common stock and securities traded on non-U.S. exchanges.)
1. Investors who opted-out of the class to pursue their own claims
The announced settlement only buys Petrobras peace on one side (the U.S. securities class action against it) of a multi-front war. In the U.S., dozens of institutional investors “opted-out” of the class to pursue their own claims. Others negotiated tolling agreements to preserve claims and inform defendants of their losses.
During the summer of 2017, the U.S. securities class action bar further pressed institutional investors to pursue direct claims, emphasizing the potential for negotiated resolutions near term given the company’s perceived desire to put the scandal fully behind it. Twenty of the 27 direct actions have now settled.
2. Investors outside of the U.S.
Outside of the U.S., investors who lost money in Petrobras common stock filed arbitrations in Brazil following the federal court’s decision to enforce company by-laws requiring use of this forum. In the Netherlands, a Foundation was established to seek restitution for non-U.S. securities claims against the company.
If, as many believe, Petrobras wants global peace, it will also attempt to resolve these other claims. The percentage of their losses that investors recover in each forum will help inform litigation decisions in future matters. Will investors recover more by filing in the U.S. or overseas? Will they get more staying in a U.S. class or ‘opting out’ to pursue their claims directly? What’s the efficacy of a Dutch Foundation compared to litigation in the issuer’s home country? We should get answers to these questions here.
3. What can investors learn from this settlement?
The case against Petrobras is strong from liability, damages, and collectability standpoints. The record settlement occurred despite an advantageous point for Petrobras in the litigation: a pending appeal of the lower court’s grant of class certification and an ordered stay on trials of the direct actions. Yes, $2.9 billion is a big number; but as the Wall Street Journal recently noted, the scandal “wip[ed] out some $271 billion, or almost 90%, of Petrobras’s market value between 2009 and 2015.” That’s just shy of 11%.
By contrast, Petrobras has allocated an amount equal to about 15% of the class settlement to resolve the 27 direct actions. In a September 13, 2017 press release announcing its settlement with the Discovery Global Citizens Master Fund, Ltd., the company said that “[a]s a result of the agreements reached and the stage of negotiations in progress with other individual action plaintiffs, the total value of the estimated provisions amounts to US$ 445 million in the 2nd quarter of 2017 (of which US$ 372 million are provisioned in 2016), totals US$ 448 million.” We have yet to hear on results from the Brazilian arbitrations and Dutch Foundation.
Even large issuers like Petrobras have limits on their D&O insurance and ability to pay and must therefore allocate a finite amount of resolution money (net of their legal fees and case costs) among competing investor claims in multiple jurisdictions. While it’s still too early to tell how much each group here will receive, when Petrobras does finally resolve the full settlement pie, institutional investors will glean significant insights into the relative merits of these different avenues for recovery. In the long term, this may prove far more valuable than the dollars they recover in the $2.9 billion class action settlement.
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- December 2016: Petrobras settles opt-out lawsuits with several funds
- July 2016: Direct litigation actions against Petrobras soar, FRT tells Ignites
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