In March 2014, the Federal Police of Brazil commenced a money laundering investigation, with a focus of small businesses, including petroleum stations and car washes. The authorities dubbed it Lava Jato (Operation Car Wash). Shortly thereafter, police discovered they were on to something much bigger. They discovered the black-market money dealers, or doleiros, were linked to a key executive at Petrobras, Brazil’s largest and most renowned oil and gas company.
Brazilian prosecutors soon exposed a vast and complicated web of corruption where numerous Petrobras directors were intentionally overpaying on contracts, in order to receive kickbacks into secret slush funds. This enriched those Petrobras directors, hundreds of co-conspirators, plus a number of politicians, and who were all beneficiaries of payoffs. In total, it was believed that shareholders and taxpayers were defrauded out of billions of dollars.
Upon public disclosure of the money laundering operation, Petrobras’ stock price significantly declined and havoc within the Brazilian business and political landscapes became widespread. Shortly thereafter, investors filed multiple class action lawsuits in the United States and Brazil (and later in the Netherlands).
At the peak, in 2008, Petrobras’ market value reached $300 billion. However, its market value dropped to around $55 billion in early 2015.
In July 2018, after 3.5 years of litigation in the Southern District of New York, Petrobras agreed to a $3 billion settlement with investors who acquired its NYSE American Depository Receipts from January 22, 2010 – July 28, 2015. Interestingly, this was the largest U.S. shareholder settlement against a foreign issuer, and the fifth largest all-time settlement. Investor-related litigation in Brazil and the Netherlands remain active.
Recently, in late June 2021, the U.S. Securities and Exchange Commission released further information related to the creation of a “Fair Fund” – an investor protection formed from the Sarbanes-Oxley Act of 2002. This allows penalties to be distributed to harmed investors.
The SEC ordered a civil money penalty to Petrobras of $853,200,000, subject to reductions of up to $682,560,000 and $85,320,000 for monies paid to the Brazilian authorities and the United States Department of Justice respectively, resulting in a post-reduction minimum penalty of $85,320,000, to the Commission (upon settlement, this Petrobras Fair Fund will be roughly the 40th largest of all-time).
There is a 30-day current comment period, for investors and other interested parties to provide feedback to the SEC. Soon thereafter, the SEC will likely announce a claim deadline date and further details surrounding the $85,320,000 disgorgement. The SEC previously issued an order appointing Epiq Systems, Inc. as the Fund Administrator, to supervise investor claims and manage disbursements.
ISS Securities Class Action Services will continue to follow this important action on behalf of its investment clients… with updated details occurring via the RecoverMax platform and email alerts.
By Jeff Lubitz, Executive Director, ISS Securities Class Action Services