Pomerantz LLP

Petrobras: The Whole Barrel is Tainted, Not Just Four Rotten Apples

Attorney: Justin Nematzadeh
Pomerantz Monitor July/August 2015

On July 9, 2015, Pomerantz won a significant victory for investors against Petrobras, the Brazilian energy giant, and four of its senior executives, when the district court rejected defendants’ motion to dismiss the action. For years Petrobras has been embroiled in a massive scandal, as prosecutors there have been pursuing the largest corruption investigation in that country’s history.In 2009 Petrobras had a market capitalization of $310 billion; now, since this massive scheme came to light, itis down to $55 billion. As the Monitor previously reported, the scheme involved overcharging Petrobras for goods and services, with the excessive payments being used to bribe a host of Petrobras and government officials.This scheme was allegedly orchestrated by four Petrobras officials, all of whom are defendants in our action.

The heart of the company’s motion was its contention that scienter, or knowledge, of the wrongdoing was limited to four “rogue” officers of the company, and that their knowledge cannot be “imputed,” or attributed, to the company, under the so-called “adverse interest” theory. Normally, a company is deemed to know what its senior executives know; but if those executives are acting for their own personal interests, and contrary to the interests of their company, they are acting outside the scope of their employment and their knowledge is not imputed to the company. Here, defendants argued that the officers’conduct was adverse to the company’s interests because the scheme diverted cash from the company, as a result of the overcharges the company paid, and into the pockets of the four individual defendants and various corrupt politicians and other conspirators. In addition, by artificially inflating asset values on Petrobras’ balance sheet,defendants argued that the individuals harmed the company by causing it to pay excessive prices that were reflected in the carrying value of those assets.

But, as senior Pomerantz partner Jeremy Lieberman explained to the Court at the hearing on the motion to dismiss, knowledge of the scheme was not limited to the four “rotten apples,” but was, in fact, widely disseminated in the company. Most notably, perhaps, he highlighted evidence showing that the Petrobras board was aware of the over billing scheme. Moreover, he argued that the adverse interest exception applies only when the company receives no benefit what-soever from the misconduct. Here,in contrast, the beneficiaries of the scheme were officials of the Brazilian government – which owns 51% of Petrobras’ stock. Moreover, by failing to correct the company’s fraudulent financial statements,the defendants were benefiting Petrobras by avoiding a massive write-down of the company’s assets.

Defendants also argued that the scheme was immaterial because its payments to contractors were inflated by only 3% and that the four conspirators received kickbacks amounting to a small portion of this 3%. As a result, when the scheme was disclosed Petrobras was forced to write off only $2.5 billion of property, plant and equipment on its balance sheet, about 8% of the total assets. In fact, however, our well-founded allegations showed that Petrobras was over billed by about 20%, not 3%, and that the $2.5 billion write-down reflected only a small fraction of the actual impact of the fraudulent scheme.