By Mike Lange, Securities Litigation Counsel, Financial Recovery Technologies
The Petrobras securities litigation may be one of the most significant matters in years. On February 6, 2018, the Honorable Judge Rakoff again bucked convention when he refused to seal from, and put into the public record, three side agreements between parties to the $3 billion class action settlement. Their disclosure will likely draw challenges from investors and further shape the class action landscape going forward.
Here are three more things to know about the Petrobras case to help you understand how this $2.9 billion class action settlement may prove far more valuable for institutional investors than the dollars they recover:
1. Settlement ‘blow provisions’
Securities class actions settlements typically contain provisions permitting defendants to recapture some of the money if too many class members exclude themselves. Courts have traditionally permitted parties to keep these side deals– referred to as blow provisions – secret because their disclosure could give investors leverage.
In Petrobras, the agreements are now public. Knowing the amount of losses necessary to ‘blow’ the settlement could give larger Petrobras investors, alone or as a group, leverage to strike better deals in return for not filing or withdrawing their exclusions to keep the class settlement on track.
2. Anticipating legal fees and expense reimbursement
The Court also put in the public record a side deal between the parties saying that if the Court approved the settlement and that decision is appealed, class counsel can still get from the settlement monies 100% of their expenses and up to 50% of legal fees awarded by Judge Rakoff, rather than having to wait for the appeal(s) to conclude before getting paid.
Petrobras investors of all sizes may challenge early payments to the lawyers while they must wait until resolution of any appeal(s) to receive their compensation.
Judge Rakoff felt that “secret agreements … rarely serve the public interest.” He also noted “a certain irony in counsel for plaintiffs – who have premised their claim of fraud on defendants’ alleged failure to disclose material information – seeking to keep secret three agreements that are a material part of the settlement.” In short, class members are entitled to full transparency of information bearing on their decision about whether to participate in a settlement negotiated on their behalf.
3. Institutional versus retail investors
If other judges follow Judge Rakoff’s lead and disclose side deals in future settlements, we could see a further tension between institutional and retail investors as the former use their size to negotiate larger slices of settlement pies, leaving less for the class.
Ultimately, it may further incentivize institutional shareholder to ‘opt-out’ of high profile securities fraud cases like this one.
- January 2018: Petrobras: What investors can gain from this case (in addition to the $2.9 billion class action settlement)
- 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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